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ALLY's Post Q3 Earnings Review: Time to Hold or Bet on the Stock?
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Ally Financial Inc. (ALLY - Free Report) , a leading auto lender and provider of other consumer loans, announced third-quarter 2024 results on Oct. 18, before the opening bell. The company’s top and bottom lines outpaced the Zacks Consensus Estimate and grew year over year.
Yet, since the announcement of the quarterly numbers, Ally Financial’s shares have been down 2%. On the conference call, the company noted that the current “dynamic operating environment” including high interest rates, volatility and “cumulative inflationary pressure” has strained its consumers. This has, thus, resulted in “more volatility in our near-term outlook, particularly on credit costs and margin.”
Hence, near-term headwinds spooked investors, leading to a pessimistic stance. Investors' sentiments toward the stock had turned bearish since the Barclays Global Financial Services Conference in early September, when ALLY’s chief financial officer, Russ Hutchinson, warned of the deteriorating credit condition of its borrowers. He also voiced concerns about increasing delinquencies in its retail auto-loan business.
These woes dragged Ally Financial stock down. In the third quarter, the company’s shares declined 10.2% against the industry’s rally of 6.2%. Meanwhile, its peers – Capital One (COF - Free Report) and SLM Corp (SLM - Free Report) – were better off.
Q3 Price Performance
Image Source: Zacks Investment Research
A Glance at Ally Financial’s Q3 Performance
Asset Quality: The most concerning factor was the deterioration of Ally Financial’s asset quality in the third quarter. The company reported a provision for loan losses of $645 million, which jumped 27% year over year.
Further, Ally Financial saw net charge-offs (NCOs) of $517 million or 1.50%, rising from $456 million or 1.31% reported in the prior-year quarter. This increase was due to a jump in retail auto loan NCOs (up 18.8%).
Retail Auto NCOs
Image Source: Ally Financial Inc.
During the conference call, Michael Rhodes, the company’s CEO, said, “Credit costs are elevated in a macro environment that's challenging after continued pressure from inflation and low personal savings rates.”
Net Financing Revenues: Lower average earning assets and higher funding costs resulted in a year-over-year decline in net financing revenues (the biggest revenue source for Ally Financial) during the third quarter. Further, weak auto loan demand because of relatively high interest rates (the Federal Reserve lowered the rates by 50 basis points or bps in mid-September) hurt net financing revenues. The metric was down 2.9% to $1.49 billion.
As a result, ALLY witnessed a contraction in net interest margin (NIM). The company’s asset-sensitive balance sheet hurt the company’s NIM, which declined 2 bps to 3.22%.
Other Revenues: Ally Financial posted total other revenues of $615 million, which surged 41.4% from the prior-year quarter. This was driven by the momentum within insurance and other revenue streams.
Investment Thesis on Ally Financial
As one of the leading providers of auto loans, Ally Financial continues to be in the spotlight. With the Fed signaling more interest rate cuts this year and in 2025, the company is well-poised to benefit from it over the medium term driven by the liability-sensitive nature of its balance sheet and the rise in consumer loan demand.
However, as the balance sheet will remain modestly asset-sensitive in the near term, the decline in the interest rates is expected to result in some volatility in the next few quarters. Management expects NIM to hit 4% over the medium term. However, given the near-term headwinds, the NIM target has been lowered for 2024. The company now projects NIM to be almost 3.20% this year (assuming 50 bp additional rate cuts and slower deposit betas), down from earlier guidance of approximately 3.30%. In 2023, NIM was 3.32%.
Its strategy to diversify into other businesses is supporting top-line growth. Ally Financial has expanded into the mortgage, wealth management and online brokerage businesses. Last year, the company launched Ally.ai, a proprietary, cloud-based artificial intelligence (AI) platform that allows it to integrate any AI capability into business operations at an enterprise scale.
Further, as part of its initiative to invest resources in growing core businesses and strengthen relationships with dealer customers, Ally Financial sold its point-of-sale financing business, Ally Lending, in March 2024.
Nevertheless, the current challenging operating backdrop is worrisome. Worsening asset quality will continue to hamper Ally Financial’s profitability. ALLY expects loan losses to increase in 2024. Retail auto NCO rates are now projected to be between 2.25% and 2.30% for this year, up from the prior target of approximately 2.1%. Further, consolidated NCOs are likely to be in the range of 1.50-1.55%, up from the earlier guidance of 1.45-1.5%.
Should You Stick With ALLY Stock Now?
The Zacks Consensus Estimate for ALLY’s 2024 earnings implies a 1.3% decline year over year because of near-term concerns related to asset quality and NIM pressure. On the other hand, 2025 earnings indicate 40.9% growth.
Earnings Estimates
Image Source: Zacks Investment Research
Find the latest earnings estimates and surprises on ZacksEarnings Calendar.
Let’s look at the value ALLY offers investors at current levels. Ally Financial stock is currently trading at a 12-month trailing price-to-tangible book (P/TB) of 0.88X. This is below the industry’s 1.29X.
Price-to-Tangible-Book (TTM)
Image Source: Zacks Investment Research
Ally Financial stock is trading at a discount compared with COF and SLM. At present, COF has a P/TB of 1.33X and SLM has 2.64X.
Though the stock looks cheap compared with the industry and its peers, investors must keep an eye on how the interest rate cuts and asset quality play out in the near term before making any decision. Given the near-term challenges — rising credit costs, NIM contraction and limited upside potential— current investors might consider booking profits now. ALLY carries a Zacks Rank #5 (Strong Sell) at present.
Image: Bigstock
ALLY's Post Q3 Earnings Review: Time to Hold or Bet on the Stock?
Ally Financial Inc. (ALLY - Free Report) , a leading auto lender and provider of other consumer loans, announced third-quarter 2024 results on Oct. 18, before the opening bell. The company’s top and bottom lines outpaced the Zacks Consensus Estimate and grew year over year.
Yet, since the announcement of the quarterly numbers, Ally Financial’s shares have been down 2%. On the conference call, the company noted that the current “dynamic operating environment” including high interest rates, volatility and “cumulative inflationary pressure” has strained its consumers. This has, thus, resulted in “more volatility in our near-term outlook, particularly on credit costs and margin.”
Hence, near-term headwinds spooked investors, leading to a pessimistic stance. Investors' sentiments toward the stock had turned bearish since the Barclays Global Financial Services Conference in early September, when ALLY’s chief financial officer, Russ Hutchinson, warned of the deteriorating credit condition of its borrowers. He also voiced concerns about increasing delinquencies in its retail auto-loan business.
These woes dragged Ally Financial stock down. In the third quarter, the company’s shares declined 10.2% against the industry’s rally of 6.2%. Meanwhile, its peers – Capital One (COF - Free Report) and SLM Corp (SLM - Free Report) – were better off.
Q3 Price Performance
Image Source: Zacks Investment Research
A Glance at Ally Financial’s Q3 Performance
Asset Quality: The most concerning factor was the deterioration of Ally Financial’s asset quality in the third quarter. The company reported a provision for loan losses of $645 million, which jumped 27% year over year.
Further, Ally Financial saw net charge-offs (NCOs) of $517 million or 1.50%, rising from $456 million or 1.31% reported in the prior-year quarter. This increase was due to a jump in retail auto loan NCOs (up 18.8%).
Retail Auto NCOs
Image Source: Ally Financial Inc.
During the conference call, Michael Rhodes, the company’s CEO, said, “Credit costs are elevated in a macro environment that's challenging after continued pressure from inflation and low personal savings rates.”
Net Financing Revenues: Lower average earning assets and higher funding costs resulted in a year-over-year decline in net financing revenues (the biggest revenue source for Ally Financial) during the third quarter. Further, weak auto loan demand because of relatively high interest rates (the Federal Reserve lowered the rates by 50 basis points or bps in mid-September) hurt net financing revenues. The metric was down 2.9% to $1.49 billion.
As a result, ALLY witnessed a contraction in net interest margin (NIM). The company’s asset-sensitive balance sheet hurt the company’s NIM, which declined 2 bps to 3.22%.
Other Revenues: Ally Financial posted total other revenues of $615 million, which surged 41.4% from the prior-year quarter. This was driven by the momentum within insurance and other revenue streams.
Investment Thesis on Ally Financial
As one of the leading providers of auto loans, Ally Financial continues to be in the spotlight. With the Fed signaling more interest rate cuts this year and in 2025, the company is well-poised to benefit from it over the medium term driven by the liability-sensitive nature of its balance sheet and the rise in consumer loan demand.
However, as the balance sheet will remain modestly asset-sensitive in the near term, the decline in the interest rates is expected to result in some volatility in the next few quarters. Management expects NIM to hit 4% over the medium term. However, given the near-term headwinds, the NIM target has been lowered for 2024. The company now projects NIM to be almost 3.20% this year (assuming 50 bp additional rate cuts and slower deposit betas), down from earlier guidance of approximately 3.30%. In 2023, NIM was 3.32%.
Its strategy to diversify into other businesses is supporting top-line growth. Ally Financial has expanded into the mortgage, wealth management and online brokerage businesses. Last year, the company launched Ally.ai, a proprietary, cloud-based artificial intelligence (AI) platform that allows it to integrate any AI capability into business operations at an enterprise scale.
Further, as part of its initiative to invest resources in growing core businesses and strengthen relationships with dealer customers, Ally Financial sold its point-of-sale financing business, Ally Lending, in March 2024.
Nevertheless, the current challenging operating backdrop is worrisome. Worsening asset quality will continue to hamper Ally Financial’s profitability. ALLY expects loan losses to increase in 2024. Retail auto NCO rates are now projected to be between 2.25% and 2.30% for this year, up from the prior target of approximately 2.1%. Further, consolidated NCOs are likely to be in the range of 1.50-1.55%, up from the earlier guidance of 1.45-1.5%.
Should You Stick With ALLY Stock Now?
The Zacks Consensus Estimate for ALLY’s 2024 earnings implies a 1.3% decline year over year because of near-term concerns related to asset quality and NIM pressure. On the other hand, 2025 earnings indicate 40.9% growth.
Earnings Estimates
Image Source: Zacks Investment Research
Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
Let’s look at the value ALLY offers investors at current levels. Ally Financial stock is currently trading at a 12-month trailing price-to-tangible book (P/TB) of 0.88X. This is below the industry’s 1.29X.
Price-to-Tangible-Book (TTM)
Image Source: Zacks Investment Research
Ally Financial stock is trading at a discount compared with COF and SLM. At present, COF has a P/TB of 1.33X and SLM has 2.64X.
Though the stock looks cheap compared with the industry and its peers, investors must keep an eye on how the interest rate cuts and asset quality play out in the near term before making any decision. Given the near-term challenges — rising credit costs, NIM contraction and limited upside potential— current investors might consider booking profits now. ALLY carries a Zacks Rank #5 (Strong Sell) at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.