Repositioning And Auto Finance Strength Will Drive Future Success

Key Takeaways

• Strategic repositioning and capital redeployment could reduce risk and enhance net interest margins, supporting profitability and long-term earnings growth.
  
• Strong brand sentiment and customer loyalty may drive revenue growth in digital banking and auto finance through retention and acquisition.
  
• Macroeconomic shifts and sector-specific challenges, including elevated delinquencies and weather-related losses, present significant risks to Ally Financial's revenue and earnings trajectory.

Catalysts

A digital financial-services company, provides various digital financial products and services in the United States, Canada, and Bermuda.

• The sale of Ally's credit card business has allowed the company to strengthen their balance sheet, reducing credit risk and redeploying capital into more strategic areas, potentially enhancing net interest income and supporting long-term earnings growth.
  
• Ally’s strategic portfolio repositioning, through actions like the execution of securities repositioning transactions, is expected to reduce interest rate risk and enhance net interest margin, which could support future profitability.
  
• Ally's Auto Finance business continues to show strength, with record application volumes allowing the company to maintain selective loan origination, which is expected to optimize both pricing and credit and enhance future net margins.
  
• There is a focus on sustained organic growth in Ally's three core franchises (Dealer Financial Services, Corporate Finance, and Deposits) while maintaining disciplined expense management and capital allocation, aimed at driving mid-term return on equity expansion, potentially boosting net margins and overall earnings.
  
• The company’s strong Net Promoter Score and robust brand sentiment are seen as competitive advantages, likely fostering customer loyalty and supporting future revenue growth through customer retention and new customer acquisition in their digital banking and auto finance segments.

Ally Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ally Financial's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 30.9% in 3 years time.
• Analysts expect earnings to reach $2.9 billion (and earnings per share of $5.92) by about May 2028, up from $191.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.1x on those 2028 earnings, down from 52.3x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.7x.
• Analysts expect the number of shares outstanding to grow by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.02%, as per the Simply Wall St company report.

Ally Financial Future Earnings Per Share Growth

Risks

• The recent sale of Ally's credit card business and its integration into overall financials could lead to near-term volatility and impact adjusted net revenue, as indicated by the adjustments made to core metrics.
  
• Changes in trade policy, such as tariffs, may create uncertainty that affects consumer behavior and the broader automotive market, potentially impacting Ally's auto finance revenue streams.
  
• Macroeconomic uncertainties, including potential shifts in interest rates, present risks that could affect net interest margins and the overall trajectory of earnings.
  
• Elevated delinquencies remain a concern, despite decreasing charge-off rates, representing underlying credit risks that could impact net income if economic conditions deteriorate.
  
• Ally's insurance segment experienced significant weather-related losses, the highest in their history, which could impact net margins if such unpredictable events continue at this scale.

Valuation

• The analysts have a consensus price target of $41.444 for Ally Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $56.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.5 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 11.0%.
• Given the current share price of $32.54, the analyst price target of $41.44 is 21.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.