Ally Financial (NYSE:ALLY) is one of this year’s many out of favor financial stocks. The stock took a beating during the Spring 2023 banking crisis, and hasn’t fully recovered since. Although ALLY stock is widely owned by high profile investors, including Warren Buffett, its price is still going down.
Despite its bearish price trend, ALLY actually has a lot of things going for it. First and foremost, it has a high dividend yield–close to 5%. Second, it’s cheap–and I don’t mean cheap in the way that financials in general are cheap these days, I mean cheap even by the standards of financials.
According to Seeking Alpha Quant, Ally Financial currently trades at:
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6.2 times earnings.
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1.0 times sales.
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0.9 times book value.
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1.3 times operating cash flow.
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A 3 price-to-free cash flow multiple (calculated by the author).
These are some very low multiples. The operating cash flow multiple, in particular, is shockingly low–although cash flow metrics are sometimes seen as unreliable for lenders as cash outflows for loan issuance are considered positive events.
Nevertheless, we have got ALLY here trading at a significant discount to the value of its assets, net of debt. It’s also cheap compared to earnings and sales. In many ways, this is the kind of valuation that you saw regional banks trade at during the Spring 2023 banking crisis. In March and April, several regional banks collapsed, sending the entire banking sector into turmoil. At the time, it was common to see regionals trading at five or six times earnings, like ALLY is now. However, ALLY’s liquidity is much better than those banks’ were, with enough highly liquid assets on its books to cover 26% of deposits. This is not the kind of liquidity coverage we expect of the larger banks, but ALLY’s deposit mix is different from theirs, consisting mainly of high yield savings accounts and certificates of deposits (CDs). These are high yield accounts that won’t likely send ALLY’s depositors fleeing to treasuries, so the liquidity coverage is basically adequate.
So, what we have here is a very cheap financial stock with a reasonable amount of liquidity. It is unlikely to suffer a “bank run” and go under, therefore the reasons that people have for selling banks down to low single digit multiples don’t seem to apply here. For this reason I consider Ally Financial a top value idea for 2023. In the ensuing paragraphs I will flesh out that thesis in detail, focusing on the company’s liquidity, growth and profitability.
ALLY – Overview
Because Ally Financial is a relatively small company, with a $7.4 billion market cap, it helps to start this analysis off with a basic overview of the firm. Unlike, say, Bank of America (BAC), ALLY is not necessarily well known to every investor, so it would help to familiarize readers with this company and what it does.
Ally Financial is a financial services company best known for offering car loans. It started off as a subsidiary of General Motors (GM), but was spun off to a group of private investors, then finally listed as a public company. Originally, ALLY just offered car loans, but it later expanded into a full service bank, with products like:
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Savings accounts.
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CDs.
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Insurance.
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Credit cards.
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Mortgages.
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Brokerage services.
Part of the reason why I’m more bullish on ALLY than most Seeking Alpha Analysts are is because of how diversified the company has become. It’s undeniably true that Ally started off as an auto finance company, and auto finance remains its biggest segment today. However, the company does have other segments and weakness in the used car market does not make it impossible for this company to be profitable.
In its most recent quarter, ALLY’s segment results (in EBIT terms) were:
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$501 million in auto finance.
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$72 million in corporate finance.
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$21 million in mortgages.
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$8 million in insurance.
These amounts sum to $602 in EBIT, making auto finance 80% of the total. Obviously, it’s far and away the company’s biggest segment, but ALLY isn’t a pure play auto finance company.
Also, the most recent inflation data seems to suggest that used car prices are healthy. One of the reasons why some analysts rated ALLY a sell over the Summer was because used car prices were going down, reducing the value of ALLY’s collateral. However, the latest inflation report suggests that trend has reversed. The most recent CPI report showed increases in the prices of used cars as well as new ones. Most banks covering the sector still think that prices will go down in the future, but a few of them are now expecting price increases. That forecast would be bullish for ALLY if it came to pass.
Liquidity
One reason I’m fairly bullish on Ally Financial today is because its liquidity situation is pretty good given the nature of its deposits. The company hasn’t been reporting a liquidity coverage ratio for the last few years, but it does list its cash, investment securities and deposits in its earnings releases. At the end of the second quarter, these stood at:
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$7.4 billion in cash and equivalents.
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$32 billion in highly liquid investments.
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$152 billion in deposits.
So we’ve got $39.7 billion in liquidity here against $152 billion in deposits, meaning that ALLY could survive 26% of its depositors fleeing. Normally it’s best for this ratio to be above 50% but 26% appears adequate given the nature of ALLY’s deposits. The company says that its average deposit yield is 3.68%, yet its checking account only yields 0.10%. This implies that the vast majority of the company’s deposits are high yield savings accounts and CDs. High yield accounts are at much less risk than checking accounts because they offer yield, and CDs are locked in for defined periods of time. So, Ally has good liquidity when we consider the nature of its deposits.
Profitability
Another factor that Ally Financial has going for it right now is profitability. In the second quarter, ALLY had $301 million in net income on $2 billion in revenue, giving a healthy 15% net margin. The company also had 10.8% return on equity and a 13.2% return on capital employed–both very healthy. As for profitability in the entire trailing 12 month period, Seeking Alpha Quant reports the following, and gives ALLY an ‘A’ grade:
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16.3% net margin.
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9.77% return on equity.
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0.62% return on assets.
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43.13% CAPEX/sales.
By any measure, Ally Financial is a highly profitable company. Its margins aren’t as high as some other bank stocks I’ve looked at this year–BAC has a near-30% net margin–but the profit metrics are better than what you’ll find at many companies in the S&P 500.
Growth
Last but not least, we have growth. Out of all the factors I’ve looked at in this article, this one is the least flattering for ALLY. In the trailing 12 month period, the company delivered:
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-11.37% growth in revenue.
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-3.55% growth in EBIT.
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-48% growth in net income.
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-44% growth in ROE.
I won’t lie, these figures are pretty bad. However, the cause (apart from rising interest expenses) is well known: the decline in used car prices and sales volumes following the 2020/2021 COVID price spike. Should that trend be reversing, like the latest CPI report suggests, then ALLY’s forward growth may be better than what was seen in the trailing 12 month period. Additionally, this company’s long term averages are much better than what was seen in the TTM period. On a five year CAGR basis, Ally has delivered:
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5.12% CAGR growth in revenue.
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9% growth in net interest income.
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2.9% growth in net income.
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8.7% growth in diluted EPS.
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2.8% growth in total assets.
For a company trading at 5.6 times earnings, these figures are actually pretty strong. So, should the car market normalize and/or interest rates decline, Ally may be able to give investors some growth.
The Bottom Line
The bottom line on Ally Financial is that it’s a 5% yielding financial stock that’s going through a very temporary rough patch. To be sure, its earnings performance this year has been much worse than that of the large banks, but its liquidity is adequate and its deposits are actually increasing. Growth is the obvious weak spot here, but that’s largely due to a cyclical decline from very strong growth in 2021. Should used and new car prices recover, like the latest CPI report suggests, then ALLY may be able to get its growth back, and deliver good results for investors.
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