Refocusing On Dealer Financial Services And Cost Savings Will Strengthen Future Operations

Key Takeaways

• Simplifying operations through the sale of the Credit Card business and ceasing mortgage loans can boost net interest margins and returns.
  
• Revenue growth is expected from core franchises and insurance advantages, enhancing shareholder value.
  
• Volatile interest rates, market competition, and strategic business realignments could impact Ally Financial's earnings, margins, and revenue diversification.

Catalysts

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

• The sale of the Credit Card business will simplify operations, reduce expenses, and generate cash for reinvestment in higher-yielding asset classes, potentially improving net interest margins (NIM) and financial returns.
  
• Ceasing mortgage loan originations allows for the redeployment of capital into higher-yielding assets, supporting NIM expansion and enhancing earnings.
  
• Enhanced loss mitigation strategies in auto finance, including repossession timing and communication enhancements, are expected to reduce credit losses and improve net margins over time.
  
• The reduction in force and resultant $60 million in annualized savings will streamline operations and align the cost structure, positively impacting net margins and operating leverage.
  
• Growth in core franchises such as Dealer Financial Services, Corporate Finance, and deposits, along with focus on leveraging competitive advantages in insurance, is expected to drive revenue growth and strengthen shareholder value.

Ally Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ally Financial's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 22.5% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $7.15) by about January 2028, up from $559.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.6 billion in earnings, and the most bearish expecting $1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 21.3x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.47%, as per the Simply Wall St company report.

Ally Financial Future Earnings Per Share Growth

Risks

• Volatile interest rates have pressured financial results, which could impact future earnings and net margins.
  
• The sale of the Credit Card business and cessation of new mortgage loan originations might reduce diversified revenue streams, affecting revenue growth.
  
• Adoption of a new deferral method for EV lease tax credits temporarily reduced CET1 and retained earnings, which could impact capital returns and potentially earnings in the short term.
  
• Potential reversion of favorable flow-to-loss trends or worsening used vehicle values due to economic instability could increase charge-off rates, affecting net margins and overall profitability.
  
• Intense competition in the auto finance market could impact price stability and margins, which might reduce future earnings potential.

Valuation

• The analysts have a consensus price target of $44.62 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 $34.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.7 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 10.5%.
• Given the current share price of $39.06, the analyst's price target of $44.62 is 12.5% 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.