Ally Financial ALLY, a leading auto lender and provider of other consumer loans, is slated to announce third-quarter 2024 results on Oct. 18, before the opening bell.
Some of ALLY’s close peers – Navient NAVI and OneMain Holdings OMF – are scheduled to report the quarterly numbers on Oct. 30. Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
Ally Financial’s second-quarter performance was not so impressive. The company’s main revenue source — net financing revenues — declined 5% year over year because of higher funding and deposit costs. This dragged the top line down. Further, provision for loan losses rose 7%.
This time, a substantial jump in provisions is likely to have hurt ALLY’s earnings. Over the past week, the Zacks Consensus Estimate for earnings has been revised 1.8% lower to 55 cents. This indicates a 33.7% plunge from the prior-year quarter.
Estimate Revision Trend
Image Source: Zacks Investment Research
ALLY has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with the average beat being 24.71%.
Earnings Surprise History
Image Source: Zacks Investment Research
On the other hand, a steady improvement in consumer loan demand is expected to have supported Ally Financial’s revenues. The consensus estimate for sales of $2.06 billion implies 4.8% growth.
Major Factors to Impact Ally Financial’s Q3 Results
Net Financing Revenues: Overall, consumer loan demand was steady during the third quarter, while auto loan demand was weak. As the central bank lowered interest rates by 50 basis points (bps) during the September FOMC meeting, the lending scenario improved slightly. These are expected to have favorably impacted ALLY’s net financing revenues though funding and deposit costs remained elevated.
The Zacks Consensus Estimate for ALLY’s net financing revenues is pegged at $1.5 billion, suggesting a 1.8% year-over-year fall. Our estimate for the metric is $1.56 billion.
The company expects net interest margin to expand in the low end of the 5-15 bps range from 3.3% in the second quarter of 2024.
Other Revenues: The Zacks Consensus Estimate for insurance premiums and service revenues earned of $344.4 million suggests a rise of 7.6% from the prior-year quarter. Our estimate for the same is $334.7 million.
The Zacks Consensus Estimate for net gain on mortgage and automotive loans of $5.7 million indicates a surge of 42.8%. Our estimate for the same is $4.9 million.
The Zacks Consensus Estimate for total other income is pegged at $552.1 million, suggesting a year-over-year rise of 26.9%. Our estimate for total other income is $517.8 million.
Expenses: Ally Financial has been witnessing a persistent rise in expenses over the past several quarters. As it launches products and seeks to expand into newer areas of operations, overall costs are likely to have been elevated in the third quarter.
Our estimate for non-interest expenses is $1.29 billion, indicating a rise of 5% from the prior-year quarter.
Asset Quality: Ally Financial’s asset quality is expected to have worsened in the third quarter. At the Barclays Global Financial Services Conference in early September, the company’s chief financial officer, Russ Hutchinson, warned of the deteriorating credit condition of its borrowers.
Hutchinson said, “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture.” He also noted that the company is witnessing increased delinquencies in its retail auto-loan business.
Retail Auto Net Charge-Offs
Image Source: Ally Financial Inc.
In July and August, ALLY’s delinquencies rose about 20 bps above what was expected. Further, its net charge-offs or NCOs (debts that are not likely to be recovered) in the retail auto business were 10 bps higher than expectations in these two months.
Hutchinson stated that the company’s NCO rate is likely to rise further in the coming months (especially in the 61-plus-day delinquency bucket) as a large number of borrowers are struggling amid the weakening economic outlook.
Thus, given such a backdrop, Ally Financial’s provision for loan losses is expected to have risen in the to-be-reported quarter. Our estimate for the metric is $589.2 million, suggesting a 16% jump on a year-over-year basis.
What Our Model Unveils for ALLY
Per our proven model, the chances of Ally Financial beating estimates this time are low. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here, as you can see below.
Ally Financial has an Earnings ESP of +2.44%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
ALLY carries a Zacks Rank #4 (Sell) at present.
You can see the complete list of today’s Zacks #1 Rank stocks here.
ALLY’s Price Performance & Valuation
In the third quarter, concerns related to its asset quality dragged Ally Financial’s shares down. The stock declined 10.2% against the industry’s rally of 6.2%. Its close peers – NAVI and OMF – were better off.
Q3 Price Performance
Image Source: Zacks Investment Research
Let’s look at the value ALLY offers investors at current levels.
Ally Financial stock is currently trading at a 12-month trailing price-to-tangible book (P/TB) of 0.94X. This is below the industry’s 1.28X.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Ally Financial stock is trading at a discount compared with OMF, which has a P/TB of 4.04X. On the other hand, NAVI has a P/TB of 0.85X, making it inexpensive compared with ALLY.
Investment Thesis on Ally Financial
As one of the leading providers of auto loans, Ally Financial continues to be in the spotlight. With the Fed signaling more interest rate cuts this year and in 2025, the company is well-poised to benefit from it as consumer loan demand ticks up.
Its strategy to diversify into other businesses is supporting top-line growth. Ally Financial has expanded into the mortgage, wealth management and online brokerage businesses. Last year, the company launched Ally.ai, a proprietary, cloud-based artificial intelligence (AI) platform that allows it to integrate any AI capability into business operations at an enterprise scale.
Further, as part of its initiative to invest resources in growing core businesses and strengthen relationships with dealer customers, Ally Financial sold its point-of-sale financing business, Ally Lending, in March 2024.
Nevertheless, the current challenging operating backdrop is worrisome. Deteriorating asset quality will continue to hamper Ally Financial’s profitability. ALLY expects loan losses to increase in 2024. Retail auto NCO rates are projected to be approximately 2.1% (a rise from 1.9% expected earlier), while consolidated NCOs are likely to be in the 1.45-1.5% range.
Final Thoughts on Ally Financial
As Ally Financial prepares to announce third-quarter results later this week, investors must watch for management comments about its asset quality and how it plans to navigate the current operating backdrop. Also, management's perspective on how ALLY stands to gain from lower interest rates must be taken into consideration.
The near-term challenges are likely to weigh on ALLY’s financials. With declining earnings estimates and abysmal valuation compared with its industry, the stock is witnessing negative investor sentiments.
So, investors must stay away from Ally Financial stock right now.
Zacks Names #1 Semiconductor Stock
It's only 1/9,000th the size of NVIDIA which skyrocketed more than +800% since we recommended it. NVIDIA is still strong, but our new top chip stock has much more room to boom.
With strong earnings growth and an expanding customer base, it's positioned to feed the rampant demand for Artificial Intelligence, Machine Learning, and Internet of Things. Global semiconductor manufacturing is projected to explode from $452 billion in 2021 to $803 billion by 2028.
See This Stock Now for Free >>Ally Financial Inc. (ALLY) : Free Stock Analysis Report
Navient Corporation (NAVI) : Free Stock Analysis Report
OneMain Holdings, Inc. (OMF) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
