Ally Stock: A Sell Opportunity As High Price Overshadows Weak Earnings Growth (NYSE:ALLY)

Stock Snapshot

Today’s trending story in the financial media has been today’s Fed meeting, and so what better time to revisit a bank stock I covered this summer.

Some quick facts about Detroit-based Ally Financial (NYSE:ALLY) are that it is a top 25 financial holding company, has +11MM customers, and +$196B total assets. Its business segments span across consumer banking, cards, auto finance, as well as commission-free online trading.

In case you’re wondering, since my last rating of this stock in mid-July, when I called it a hold, the share price has risen +13.62% by today (as of the writing of this article on Wednesday afternoon).

So, if an investor had held on to their shares at that time, by now they might have seen a nearly 14% improvement vs early July.

Scoring Matrix

This article uses a 9-point scoring matrix that holistically considers multiple angles of the stock, with an emphasis on cashflow potential for investors and fundamental trends from the key accounting statements publicly available such as the balance sheet and income statements, as well as a future-looking outlook on this stock.

Today’s Rating

Based on the score total in the score matrix above, this stock is getting a rating of sell.

This is a downgrade from my earlier rating of hold.

Compared to the consensus rating on Seeking Alpha, I am more bearish this time than the sentiment from analysts and the quant system.

Dividend Income Growth

This section uses dividend growth data to explores the 10 year dividend income growth for a hypothetical investor owning 100 shares, to ascertain whether this stock is a great dividend income opportunity.

Let’s look at the 10 year dividend growth chart above which tracks the period from 2013 to 2022.

If my portfolio had bought a hypothetical 100 shares in 2013, when the annual dividend shows as $0, I would have made $0 in dividend income until 2016 when the annual dividend went up to $0.16/share, so we can start there. Our annual income would have been only $16.

By 2022 it went up to $1.20/share ($120 dividend income), or a 650% growth between 2016 and 2022 (a 6 year period).

If we extrapolate forward another 6 years to 2028, if this stock’s dividend grows another 650% in that period we could see $900 in annual dividend income on 100 shares held. I know that is a huge assumption, but it helps set a framework for thinking about this stock as a dividend income generator.

I will call it a strong buy in this category, on the basis of positive and strong 6-year dividend growth of over 100% but also a history of steady quarterly payouts.

Dividend Yield vs Peers

This section uses dividend yield data to contrast the trailing dividend yield vs 3 similar peers in the same sector, to ascertain if this stock presents the most competitive dividend yield on capital invested.

To contrast my focus stock of Ally Financial against three banking peers, I chose three banks that are similar in rank on Wikipedia’s list of largest banks in the US.

These include KeyCorp (KEY), Huntington Bancshares (HBAN), and Fifth Third Bancorp (FITB).

Of this peer group, Keycorp led the pack with a trailing dividend yield of 6.30%, while Ally came in last here with a yield of 4% (same as its forward yield).

Also noteworthy from their Q3 results presentation was that the firm announced a Q4 common dividend of $0.30/share.

In this case, I will call this stock a hold in this category because a +4% dividend yield is really great as is the steady dividend history, however if picking among multiple banking peers it seems I can get a much better yield for my capital invested by going with all three of the other peers mentioned, all of which have also been profitable banks this year if you read my coverage of them this year.

Revenue Growth

This section explores this company’s revenue growth trends over the last year, using data from the income statement.

From what we can gather from this data point, the bank saw $1.67B in total revenue in Q3, vs $1.81B in Sept 2022, a +7% YoY refuse. However, also worth noting is that three of the last four quarters had improved revenues vs Sept 2022.

advocate, we can see the loss on sale of investments has improved this Q3, and although interest income rose on a YoY basis it also seems interest expense also spiked. In fact, it went up +130% on a YoY basis, which can impact net interest income and hence, total revenue.

Relevant to this topic is the latest update on today’s Fed meeting as of Wednesday afternoon. According to an article that just came out in Barron’s:

The Federal Reserve kept interest rates unchanged at the conclusion of today’s policy meeting. The decision, which was widely expected, keeps the target range for the federal-funds rate at 5.25-5.50%.

Federal Open Market Committee members’ latest Summary of Economic Projections has the federal-funds rate ending 2024 at 4.6%. Investors expected significantly more cuts in 2024.

What this can tell us, particularly investors of bank stocks, is that we could expect continued high interest income combined with elevated interest expense as well, for a few more quarters possibly.

The bank also reported taking a hit in its mortgage finance business:

Direct-to-Consumer (DTC) originations of $267 million, down 49% YoY, reflective of current environment.

In addition, they are exposed to losses in their insurance segment as well. According to their Q3 presentation, they had “insurance losses of $107 million, up $37 million YoY driven by higher weather losses.”

I will give this stock a sell in this category, on the basis of the modest refuse in YoY revenues as well as potential for continued squeeze on their interest margin.

Earnings Growth

This section explores this company’s earnings (net income) growth trends over the last year, using data from the income statement.

What we can gather is that net income/earnings dropped to $296MM, down slightly from $299MM in Sept 2022, a 1% YoY refuse. advocate, since Sept 2022 there has not been a steady trend in earnings but somewhat lopsided.

In their Q3 results, they recognized the need to cut costs and outlined some steps taken heading into 2024:

Actions taken to reduce ongoing total expense growth, estimated to save $80 million annually. Driving towards controllable expense growth of <1% in 2024 while continuing to invest for long-term Estimating total noninterest expense growth including non-controllable items of 2% in 2024.

A bright spot on that topic is that Q3 total non-interest expense of $1.44B was already down from the high of $1.5B in Dec 2022, a 4% refuse.

In this category I will call this stock a sell, on the basis of lacking steady and strong earnings growth, although I think as they try to manage costs better going into 2024 their earnings situation will be more sustainable.

Equity Positive Growth

This section explores this company’s equity (book value) growth trends over the last year, using data from the balance sheet.

This data point tells us some good news and that is $12.82B in total equity in Q3 vs $12.43B in Sept 2022, a 3.1% YoY growth.

advocate, the equity (book value) grew in all four quarters after Sept 2022, a positive trend I would say and good business fundamental indicator for any company if they can grow positive equity, unless it is one of those early-stage startups that often have negative equity for a while. This is, after all, a well established bank that is years in business.

In looking at the balance sheet, it does not appear that equity growth was driven so much by declining liabilities but rather by growth in assets. In particular, cash grew as did loans and total assets.

Also notable to cite is that the CET1 ratio is above regulatory minimums and continues to show strength:

In this category, I will call it a buy, on the basis of modest YoY equity growth and a positive equity growth trend over a longer period, combined with a CET1 well above regulatory minimums which sets it up for capital sustainability going into 2024.

Share Price vs Moving Average

This section explores the current share price compared to the 200-day simple moving average, to ascertain if it currently presents a buy, hold, or sell opportunity.

In the yChart above, we can see that the share price as of today is well above both its spring and autumn lows, which would have been much better buying opportunities than now. In fact, its share price of $32.48 is around 21% above the 200-day simple moving average.

I will call it a sell in this category of share price, on the basis that it is trading over 20% above its moving average and around $10/share higher than its autumn lows, while at the same time not having shown strong YoY revenue or earnings growth and also having a below-average dividend yield compared to peers.

Additional bullishness today after the Fed announcement also drove the share price up advocate, however I don’t think a meteoric price rise is sustainable in a company not showing strong YoY top and bottom line results, so possibly it will reverse course after the Fed’s media hype subsides in the next few days, in my opinion.

Valuation: Price-to-Earnings

This section uses valuation data to examine the forward P/E ratio and whether it presents an undervalued opportunity.

Looking at the forward P/E ratio of 9.10, it is nearly 12% below the sector average.

Tying this multiple of 9x earnings back to the financials and share price discussed earlier, we know that the share price has spiked well above its moving average while earnings have not shown YoY growth. We also can expect advocate margin squeezes as the current interest environment trudges along into 2024.

So, even though this valuation is below the average I still would call this a sell and not a buy at 9x earnings, since earnings have not really been impressive yet the share price is being chased by the bulls.

Valuation: Price-to-Book Value

This section uses valuation data to examine the forward P/B ratio and whether it presents an undervalued opportunity.

We can see the forward P/B ratio of 0.85 is almost 23% below the sector average.

Tying this back to the equity and share price discussions, I would say that this is a justified valuation at a price less than 1x book value since even though the share price has risen lately the equity has also grown nicely.

Hence, I call this a buy at this valuation, on the basis of improving equity trends.

Risk Analysis

This section identifies a key risk to consider about this company and what its probability and impact could be to the business.

A key risk for a bank admire this is rising trends in net charge-offs and delinquencies.

This bank does quite a bit of auto financing business. We can see from their Q3 presentation that they have a rising trend YoY in delinquencies and charge-offs:

In addition, across their larger portfolio there is an uptick in net charge-offs, and the segments most affected are retail auto, lending, and credit cards:

I want to reiterate that all banks will in any given year have at least some risk exposure to potential delinquencies and charge-offs. However, what I am looking for is longer-term rising trends in these, rather than one-time events. In this case, the trend is towards an boost in these.

This is not unique necessarily just to Ally Financial, though.

Consider that a September article by S&P Global’s Market Intelligence highlighted “average net charge-off rate trends higher for 6 major US card issuers in August.”

An offsetting factor I should cite is that this bank is highly liquid at $64.2B in total liquidity as of Q3 and its loan exposure is not limited just to retail consumers but the bank also has a robust corporate financing shop too.

For instance, according to Q3 results its corporate loan book includes “high-quality, 100% floating-rate lending portfolio, comprised of 61% asset-based loans, and ~100% in first lien position.”

In this category, I will call this stock a hold, on the basis of rising trends in net charge-offs and delinquencies offset by strong liquidity and strength in corporate lending.

Quick Summary

To summarize, today I’m bearish on this stock which I am downgrading from hold territory to a sell opportunity now. If I was trading this one I would sell at the current price for a capital gain especially if I had bought at the spring or autumn price, and then would redeploy some of that gain into another bank stock that pays a +5% dividend yield right now and shows a buy price.

Positives of this stock are proven dividend-income growth over 6 years, growth in equity and low price-to-book valuation.

Some areas of concern are weak revenue and earnings growth, the risk of growing net charge-offs and delinquencies, and a 9x price-to-earnings valuation.