Is Ally Stock A Buy, Sell, Or Hold Ahead Of Upcoming Earnings? (NYSE:ALLY)

Elevator Pitch

I rate Ally Financial Inc. (NYSE:ALLY) as a Buy ahead of upcoming earnings. With used car prices remaining elevated and net charge-offs for the industry rising slowly, there is a good chance that ALLY can achieve a 1Q 2022 earnings beat which would be a positive re-rating catalyst for the stock. As such, I think that ALLY is worthy of a Buy rating.

ALLY Stock Key Metrics

Before providing a preview of Ally Financial’s 1Q 2022 financial results, it is important to review the company’s most recent quarterly financial performance first.

As per its Q4 2021 results press release dated January 21, 2022, ALLY’s non-GAAP adjusted earnings per share or EPS grew by +26% YoY from $1.60 in Q4 2020 to $2.02 in the final quarter of last year. Furthermore, Ally Financial’s Q4 2021 non-GAAP EPS also came in +3% better than what the Wall Street analysts were initially expecting. A +49% (or +$276 million) YoY increase in pre-tax operating income for the automotive finance segment to $839 million in Q4 2021 was more than sufficient to offset a -50% YoY (or -$92 million) decline in the insurance segment’s pre-tax operating income to $91 million in the same quarter.

Besides the decent headline financial results, there are three other key metrics that caught my attention.

Firstly, ALLY’s adjusted net interest margin improved significantly from 2.92% in Q4 2020 and 3.68% in Q3 2021 to 3.82% in Q4 2021. Ally Financial benefited from a high proportion of low-cost deposit funding and the allocation of capital to assets boasting more attractive yields. At the company’s Q4 2021 earnings call on January 21, 2022, Ally Financial guided that it can continue to “hit that upper 3% NIM, irrespective of the rate environment.”

Secondly, Ally Financial’s retail auto net charge-offs declined from 1.49% and 1.01% for Q4 2019 and Q4 2020, respectively, to 0.48% in the most recent quarter, as per the company’s recent quarterly earnings presentation slides. ALLY’s asset quality metrics should remain healthy in 2022, as the company noted at its recent results briefing that it expects that credit “normalization will occur gradually over the next two years.”

Thirdly, ALLY announced a new $2 billion share repurchase authorization for 2022 two weeks before its Q4 2021 results announcement, according to a January 11, 2022 Seeking Alpha News article. At its fourth-quarter earnings briefing, Ally Financial revealed that its Q4 2021 CET1 ratio was “10.3%” or “$1.9 billion above our internal target” which implies that the company has the financial capacity to return excess capital to shareholders. Share buybacks should also be supportive of Ally Financial’s bottom line growth this year.

In a nutshell, ALLY’s Q4 2021 financial performance has been reasonably good. In the next three sections of the article, I focus my attention on ALLY’s upcoming Q1 2022 earnings.

When Does Ally Report Earnings?

Ally Financial disclosed that it will report its earnings for the first quarter of 2022 on April 14, 2022, as per an announcement released a month ago on March 16, 2022.

What To Expect From Earnings

I have a positive view of ALLY’s Q1 2022 earnings.

ALLY’s net financing revenue for the automotive finance segment jumped from $188 million in Q4 2020 to $1,341 million in Q4 2021, which the company largely attributed to “solid off-lease vehicle gains” in its earnings presentation slides. ALLY emphasized at its Q4 2021 investor call that “if we look at pace of used vehicle values, that continues to increase, and so the reality is, there’s probably upside to that.” An April 7, 2022 CNBC article also noted that the mean price for used vehicles that under a decade old rose by +40% YoY in March 2022. In other words, Ally Financial should continue to generate strong off-lease vehicle gains in the first quarter of this year, thanks to the sustained strength in used car prices.

Separately, I see Ally Financial’s retail automotive yield increasing in the first quarter of this year. ALLY’s retail auto origination yield was 7.1% for FY 2021. At its recent quarterly earnings call, ALLY mentioned that it is expecting that “retail auto yields continue to migrate up towards that 7% plus.” Furthermore, Ally Financial stressed that assuming “rates continue to increase as we’re expecting, that (retail automotive yield) could potentially go even higher.”

Going forward, Ally Financial has also guided for the company’s retail auto net charge-offs to still come in under 1% this year. As highlighted earlier in this article, ALLY’s retail auto net charge-offs were 0.48% in the fourth quarter of 2021. A March 16, 2022 Seeking Alpha News article highlighted that “credit card delinquency, net charge-offs” are not going up “by a lot” based on “credit card metrics reported by card-issuing banks” in February 2022. These are indicators which suggest that credit normalization is happening at a very gradual pace, and this implies that Ally Financial’s actual retail auto net charge-offs for 1Q 2022 are very likely to beat management guidance of sub-1%.

What Is Ally’s Forecast?

Ally Financial has delivered seven consecutive quarters of EPS beats starting in Q2 2020 as per S&P Capital IQ data. I expect ALLY to surpass market expectations again for Q1 2022.

The current consensus Q1 2022 EPS estimate for ALLY is $1.96 according to S&P Capital IQ. Based on the positive factors I highlighted in the preceding section such as higher-than-expected off-lease vehicle gains and lower-than-expected retail auto net charge-offs, I forecast a higher first-quarter EPS of $2.03 for Ally Financial, which translates into a +3.6% earnings beat.

Is ALLY Stock Overvalued Now?

I view ALLY’s shares as undervalued, rather than overvalued now.

The market currently values Ally Financial at a consensus forward next twelve months’ normalized P/E multiple of 5.6 times according to its last traded price of $42.89 as of April 8, 2022 and financial forecasts sourced from S&P Capital IQ.

ALLY’s current forward P/E valuation compares favorably with its historical five-year mean P/E ratio of 8.4 times and its intermediate-term target of achieving Returns on Average Tangible Common Shareholders’ Equity ROTCEs of 16-18%. Considering its ROTCE goals and its historical trading averages, it is reasonable for Ally Financial’s forward P/E multiple to expand from the mid-single digit levels to the high-single digit range at the very least in the future.

Is ALLY Stock A Buy, Sell, or Hold?

ALLY stock is a Buy. Its valuations are undemanding at a forward P/E multiple in the mid-single digit range. Better-than-expected earnings for the company in Q1 2022 and subsequent quarters could help to bring about a positive valuation multiple rating for ALLY.