Is Ally Financial Stock a buy?

This year has been difficult for the financial sector. COVID-19 has caused problems for almost all businesses at credit risk, especially banks and real estate investment trusts (REITs). About the only group that has done well is the mortgage originators, who have a year to go. Auto finance is another that has been surprisingly successful.

A company active in both sectors is Allied financial (NYSE: ALLY) – the former General Motors Acceptance Corp. (GMAC) and one of the oldest auto finance companies in the United States, for a century. Apart from a few months at the start of the crisis, the automotive sector has recovered and credit activity is doing well. But is it a purchase?

Image source: Getty Images.

Auto finance business is doing well despite COVID-19

Despite COVID-19, Ally has performed remarkably well. In the third quarter, Ally issued $ 9.8 billion in auto loans, the highest level in five years. On the earnings conference call, CEO Jeffrey Brown said “overall dealer profitability rebounded to its highest level in several years during the quarter, more than offsetting a difficult second quarter.” Auto sales rebounded quickly, posting year-over-year gains every month after May. The big question is to what extent this recent growth is just “catching up” to poor spring sales. We’ll probably need a few more months of auto sales figures to get a better idea.

Graph of sales of automobiles and other motor vehicles in the United States

Sales of automobiles and other motor vehicles in the United States given by YCharts

In addition to large volumes, the company only wrote off 0.64% of its bad debt portfolio, which is a significant drop from last year. The auto loan business pushed overall earnings per share up 26% year-over-year to $ 1.25 per share.

Ally’s banking performance is only average

During the quarter, Ally issued approximately $ 1.3 billion in mortgages, up 63% from a year ago. While this growth rate is indeed impressive, the total volume the company achieves in this industry is eclipsed by its competition. Crosstown Rival Rocket generated $ 89 billion in the last quarter. Its numbers have increased 122% year over year. According to the Mortgage Bankers Association, the typical independent mortgage lender generated $ 1.34 billion in the third quarter. In other words, Ally was definitely average, at least in this line of business.

Ally is expected to earn $ 2.39 per share this year, which is a 36% drop from 2019. Rue expects earnings to rebound to 2019 levels next year, which gives Ally a price / earnings ratio of 8.8 times. This is a reasonable multiple for a financial security. Ally pays a quarterly dividend of $ 0.19, which gives the stock a return of 2.4%. The investment risk for Ally is a prolonged period of economic weakness that begins to result in write-offs. Ally’s cancellation numbers look attractive from a year ago, but the economic recovery is still in its early stages.

Ally looks expensive on a leak basis; however, the unusually low profits in 2020 overstate the multiple. Based on the 2021 earnings multiple of 8.8, Ally is trading near the middle of its historic range.

ALLY PE ratio chart

ALLIED PE Ratio given by YCharts

I’d be more excited about Ally if he took more advantage of the current mortgage refinancing boom, which only happens once in a generation. This period is expected to last for several more years, provided the Fed cooperates and keeps interest rates low. Putting $ 1.34 billion in origination volume is average, but Ally shouldn’t just be average. The brand name alone should make it compete with heavyweights like Rocket and PennyMac Financial Services. If I gave the stock a buy, sell, or hold recommendation, I would give it a hold.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! 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.

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