The onset of the COVID-19 pandemic last year brought the global economy to a near halt, which resulted in widespread unemployment. People then put their car-buying plans on hold, which led to lower auto loan generation. As a result, Ally Financial Inc. (ALLY), which is one of the largest full-service automotive-finance operations in the U.S., took a big hit early last year.
However, optimism among investors that a quick economic recovery is in the offing has been on the rise. An effective mass vaccination drive coupled with a new federal recovery package has been driving an uptick in consumer purchasing power, and analysts expect consumer spending to return to pre-pandemic levels soon.
As a potential direct beneficiary of resuscitated consumer spending power, ALLY has been attracting investor attention. The stock has surged 11% in the past month, gaining 5.2% in the past five trading sessions.
Let’s take a closer look at the factors influencing ALLY’s performance:
Over the past three years, ALLY’s revenue and EPS have grown at CAGRs of 1.9% and 12.4%, respectively. In the fourth quarter (ended December 31, 2020), the company’s total revenue jumped 21% year-over-year to $2 billion, driven by higher gains on off-lease vehicles, higher retail auto revenue and lower funding costs. Its consumer auto originations surged 12% year-over-year to $9.1 billion and, as a result, retail deposits increased $20.6 billion year-over-year to $124.4 billion at quarter-end. In fact, its total deposits surged $16.3 billion year-over-year to $137.0 billion at year-end. Furthermore, its adjusted EPS was $1.60, compared to its year-ago value of $0.95.
Wall Street analysts expect ALLY’s current quarter revenue and EPS to improve 23% and 343.2%, respectively, year-over-year.
Efforts to Diversify Revenues
ALLY’s retail deposit customer base grew 14% year-over-year, totaling 2.25 million customers at the end of 2020, it added 39,000 customers during its last reported quarter. However, at the end of the fourth quarter, only 8% of ALLY’s deposit customers utilized multiple ALLY products. Hence, management has been taking proactive steps to grow other segments, particularly in insurance and mortgage finance.
ALLY’s insurance segment generated $183 million in pre-tax income in the fourth quarter, which was $69 million higher than the prior year period. This also implies that the segment represented 21.4% of ALLY’s overall pre-tax income from continuing operations, versus its year-ago contribution of 12.3%. Its pre-tax income from its Mortgage Finance segment was $7 million in the last quarter, an increase of $5 million year-over-year.
In terms of forward p/e, ALLY is currently trading at 10.02x, which is 25% lower than the industry average 13.35x. ALLY is trading well below the industry average in terms of trailing-12-month p/s also (2.76x versus 3.69x).
In terms of trailing-12-month price/cash flow, ALLY’s 4.56x is significantly lower than the industry average 11.39x.
POWR Ratings Indicate Promising Prospects
ALLY has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, ALLY has a Growth rating of B, which is consistent with analysts’ expectation of robust financial growth.
ALLY also has a Sentiment rating of B, reflecting greater analyst confidence. Of the 49 stocks in the C-rated Consumer Financial Services industry, ALLY is ranked #13.
Beyond what I stated above, we also have given ALLY grades for Value, Momentum, Stability and Quality. Get all the ALLY ratings here.
Better than ALLY: Click here to learn about top-rated Consumer Financial Service stocks.
After enduring a rough first two quarters, ALLY’s financials bounced back strong in the second half of 2020. Despite the challenging operating environment, the company managed to generate $4.74 billion in net financing revenue during the financial year, improving 1% year-over-year. ALLY posted an adjusted efficiency ratio of 50.3% for the full-year 2020, compared to 47.4% in the prior year.
Going forward, management expects strong consumer and commercial performance on the back of improved economic trends. Millennials and younger people continue to comprise the largest segment of new customers, accounting for 67% of new customers in the fourth quarter. ALLY’s efforts to expand into other markets and diversify revenues are expected to continue boosting its financials this year.
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ALLY shares were trading at $46.34 per share on Tuesday morning, down $0.28 (-0.60%). Year-to-date, ALLY has gained 30.59%, versus a 6.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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