Why it’s time to buy Financial
Financial entered the pandemic with a record stock price, but really showed its experience in beating earnings estimates for the past three quarters thanks to its consumer-focused business mix. As an exclusively online bank, it was perfectly positioned to serve customers in the home economy. The company now aims to expand its huge success in auto finance with other products, such as mortgages, to drive future growth. If the current trends in corporate earnings continue into the future, it could become a powerful part of your portfolio.
Earnings for the record book
Many companies can boast of a rich history, but few have seen as many storms as this century-old financial institution. Founded in 1919 by General Motors to provide auto financing to its customers, Financial remains true to its roots. It is the leader in auto finance like this, currently holding 7.7% of all auto loans in the United States – $ 106.2 billion in loans to 4 million customers.
The pandemic resulted in 14.6% fewer cars being sold in the United States last year, but loan portfolio fell only 6.5%, a notable outperformance. The company built its relationship with car dealers to 18,700 – a record high – with the goal of reaching more individual consumers amid weakness in other segments such as fleet sales. Clearly, a decision that has paid off, resulting in 54% more income, as these loans generate higher margins.
Supply chain disruptions caused a shortage of new cars, pushing average transaction prices up to a record $ 38,000, which helped cushion the blow from declining sales.
With further growth in its insurance business, corporate finance division and mortgage business, the company posted two consecutive quarters of record profits at the end of 2020:
|Quarter 2020||Estimated earnings per share||Real earnings per share||Difference|
|Q1||$ 0.70||($ 0.44)||(162.90)%|
|Q2||$ 0.28||$ 0.61||117.90%|
|Q3||$ 0.68||$ 1.25||83.80%|
|T4||$ 1.05||$ 1.60||52.40%|
According to Yahoo Finance, 13 analysts have an average profit estimate of $ 4.53 for 2021 and $ 5.51 for 2022. Applying a multiple of 16 times the average market profit, this could mean a share price of $ 72.48 this year and $ 88.16 in 2022! With a closing price on April 5 of just $ 46.92, this could represent a significant opportunity.
Ally’s performance can be measured against KRE, an S&P Regional Banking ETF. Since the trough of the pandemic in March 2020, the KRE is up 133%. By comparison, Ally Financial’s stock has increased by 360% over the same period! The company is recognized for its operational performance, but based on estimates there is still room for improvement.
The power of the consumer
Armed with $ 5.3 trillion in stimulus from the federal government, consumers appear to have weathered the worst economic shock of the pandemic. Ally Financial’s annual results for 2020 show that these payments are fueling the economy. The company has seen staggering growth in key consumer segments compared to 2019, including:
- $ 124.4 billion in deposits from 2.25 million customers, up 20% and 14% respectively. This could be due to direct checks on consumers as part of stimulus packages.
- $ 4.7 billion in new direct mortgage loans to consumers, up 74%. With the shortage of single family homes, consumers are forced to pay more and therefore borrow more.
- $ 503 million in new personal loans, up 75%.
- 406,000 new self-directed investment accounts, up 17%. These customers held $ 13.4 billion in assets, a growth of 70%. If you’ve been watching the markets over the past year, it won’t be surprising with the boom in retail investors buying stocks.
Auto sales in the United States are expected to return to growth in 2021, which should support Ally’s core financing and insurance businesses. First quarter figures are out, showing 11.8% more cars sold compared to the first quarter of 2020, thanks to strong consumer demand and low interest rates.
Look for an expansion
As an exclusively online, technology-driven bank, Ally Financial’s business relationships are essential. The success of its automotive business can be attributed to the 18,700 dealer network that connects it to consumers, but Ally has yet to replicate this advantage in other product areas.
As the lending process evolves online, the company is well positioned to expand further into other segments such as mortgages. With high year-over-year growth, its success so far is clear, but time will tell if Ally can take a significant stake in the big banks. Competing with the physical presences of its competitors can be tricky, as Ally may not generate the same level of brand awareness in a very saturated space.
In the short term, the company will likely be better served by focusing on its biggest business – automobiles – riding the wave of stimulus-driven consumer spending that is likely to continue.
Financial reports its first quarter results on April 19. The company is expected to deliver $ 1.08 per share, a figure similar to the fourth quarter, which was conveniently beaten. With the American economy now After open, and another freshly passed stimulus bill, make sure the company once again exceeds expectations.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.