Why Ally Financial Stock is Worth Adding to Your Portfolio
It seems to be a wise decision to add Ally Financial ALLY stock to your portfolio now, given the company’s efforts to diversify revenues by enhancing digital offerings and introducing new products. Also, a strong balance sheet position bodes well.
Further, analysts are bullish on the stock. The Zacks Consensus Estimate for the company’s earnings has been revised 30.7% and 8.9% upward over the past seven days for 2020 and 2021, respectively. The stock currently carries a Zacks Rank #2 (Buy).
The company’s price performance is impressive as well. Over the past six months, the stock has rallied 59.9%, outperforming the industry’s 29.3% rise.
What Makes Ally Financial an Attractive Pick?
Earnings Growth: Ally Financial’s earnings growth has been 12.2% over the past three to five years compared with 10.5% improvement for the industry. While the company’s earnings are expected to decline 68% for 2020, the same is projected to grow at the rate of 147.3% for 2021.
Moreover, Ally Financial has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with the average being 19.6%.
Revenue Strength: Backed by strong originations and retail loan growth, Ally Financial’s revenues witnessed a CAGR of 5.1% over the last five years (2015-2019). Solid origination volume, retail loan growth and rise in deposit balances are expected to keep the growth momentum intact.
While near-zero interest rates might have an adverse impact on net interest margin to some extent in the near term, rising consumer loan demand and management’s efforts to become a diversified banking company will offer support. Also, Ally Financial is making efforts to enhance digital offerings and introduce products. Further, its wealth management and online brokerage initiatives related to credit card offerings are impressive.
Its projected consensus sales are expected to fall 4.7% this year, while the same is likely to increase 5.2% next year.
Solid balance sheet position: As of Jun 30, 2020, Ally Financial had total debt worth $32.9 billion, down 19% sequentially. Also, interest expenses on long-term debt constituted 22% of total net revenues in the first half of 2020, and the company’s cash and cash equivalents balance was $19.1 billion on Jun 30, 2020.
Nevertheless, its total debt to total capital of 67.8% at the end of the second quarter of 2020 declined sequentially. We believe that while high levels of debt may negatively impact access to liquidity and increase borrowing costs in the unsecured market, the company is less likely to default in debt repayments even if the economic situation worsens, given its earnings strength.
Efficient Capital Deployment Plan: Ally Financial’s capital deployment actions are impressive. In January, it announced 11.8% dividend hike. This followed two hikes — 13.3% in January 2019 and 15.4% in July 2018. Also, it had a share repurchase authorization in place, which was suspended due to the coronavirus outbreak. Driven by capital strength, earnings growth and favorable dividend payout ratio, it will be able to sustain enhanced capital deployment activities.
Stock Seems Undervalued: With respect to price/book (P/B) and price/cashflow (P/CF) ratios, Ally Financial seems undervalued. It has a P/B ratio of 0.66 and P/CF ratio of 3.08, which are below the respective industry averages of 0.98 and 3.47.
Also, the stock has a Value Score of A. Our research shows that stocks with a Growth Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.
Other Consumer Loan Stocks Worth a Look
Navient Corporation NAVI has witnessed an upward earnings estimate revision of 14.9% for the current year, over the past 60 days. Also, its shares have lost 42.2% so far this year. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Credit Acceptance Corporation’s CACC earnings estimates have been revised 23.1% upward for the current year in the past 60 days. So far this year, Zacks Rank #2 stock, has declined 31.5%.
SLM Corporation’s SLM earnings estimates for the current year have been unchanged over the past 60 days. Its shares have witnessed an 11.9% fall so far this year. The stock carries a Zacks Rank #2.
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