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Ally Financial: An Incredible Opportunity at This Price
Stock Analysis & Ideas

Ally Financial: An Incredible Opportunity at This Price

In looking across the horizon at investment opportunities, it is difficult to find stocks trading at low P/E valuations in the current environment. One such stock is Ally Financial (ALLY), which Oakmark’s Bill Nygren called an “incredible opportunity at this price” in a recent interview with CNBC. I share Nygren’s view that Ally is a Buy right now. 

Indeed, according to its last 13F filing, Ally is the largest holding of Oakmark’s flagship fund, The Oakmark Fund, which Nygren manages. The Oakmark Fund has returned 35% over a one-year period as of November 30th, so Nygren knows where to find value in a volatile market.

This fund, which has a portfolio value of almost $17 billion, owns 12,643,100 shares of Ally as of its latest 13F filing at the end of September. So, what is Ally, and why is Nygren so constructive on it that it is Oakmark’s largest holding? (See Analysts’ Top Stocks on TipRanks)

Business Description 

Ally Financial is a $16.5 billion financial services company based in Detroit, Michigan, that offers an array of digital financial services and products to businesses and consumers in the United States in Canada. It was originally part of General Motors and offered financing on GM vehicles under the name GMAC and is probably best known for its auto lending.

The company changed its name to Ally in 2010 and has since branched out from being solely an auto lender. Most prominently, Ally was also an early mover in terms of internet banking and has become well-known for its online banking services.

In fact, Ally is now the largest online-only bank in terms of consumer deposits, with $139 billion in deposits. Ally has moved into other segments like mortgages, online brokerage, and credit cards as it continues to build a full suite of financial products for consumers.  

Nygren points out that Ally is the market leader in auto lending and that it has been able to improve its margins because many of its competitors have moved out of this segment and are focusing solely on customers with prime credit. 

Valuation

As Nygren highlights, Ally stock is cheap based on a variety of metrics. It is trading at under 5.8x this year’s earnings and 6.6x next year’s earnings.

The stock is also cheap on a price-to-book basis, a key metric for valuing banks and financial-sector companies, with a price-to-book value of just 1.13x. Even looking at the PEG ratio, which accounts for both price to earnings valuation and growth, Ally looks attractive at 0.3x.

Returns to Shareholders  

Nygren also likes that Ally is returning capital to shareholders by “very aggressively repurchasing shares.” Earlier this year, Ally announced a share buyback program that authorizes the company to repurchase $2 billion worth of shares. This is a massive buyback as it equates to over 12% of Ally’s current market cap. 

In addition to these share buybacks, Ally is a dividend stock that is currently yielding over 2%. Between the dividend and share buybacks, Ally is doing a good job of rewarding its shareholders. 

Wall Street’s Take

The analyst community shares Nygren’s view that Ally is undervalued. The consensus rating is that Ally is a Strong Buy, with 10 Buys and two Holds assigned in the past three months. There are currently no Sell ratings on Ally. 

The average Ally Financial price target is $65.33, implying 37.3% upside from current prices. Price targets range from a high of $75 to a low of $53. Interestingly, even the lowest analyst target of $53 still offers almost 11.4% upside from here.

Takeaway

Nygren points out that while the average forward P/E multiple in today’s market might be 20x, there are very few stocks trading at a 20 P/E multiple, it is more a mix of stocks with very steep valuations and some stocks with single-digit P/Es.

In the current environment where high-multiple stocks are getting slammed, I view a stock like Ally, trading at less than 7X next year’s earnings, as a more favorable investment opportunity.

Add to this the fact that the company is a market leader in its industry, is expanding into new verticals to create an online financial ecosystem, all while prioritizing returning cash to shareholders, and Ally looks like a compelling Buy at current levels. 

Disclosure: At the time of publication, Michael Byrne owned shares of Ally.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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