Can Ally Financial Beat Q1 Earnings on Lower Expenses?

Ally Financial Inc. ALLY is slated to announce first-quarter 2015 results on Apr 28, before the opening bell.

Last quarter, Ally Financial’s adjusted earnings surpassed the Zacks Consensus Estimate. Results benefited from lower expenses, partially offset by a decrease in top line and higher provision for loan losses.

Will Ally Financial be able to beat the earnings estimates again? Or will it disappoint? Let us see how things have shaped up for this announcement.

Factors Impacting Q1 Results

Primarily offering auto loans, Ally Financial’s performance is largely dependent on the overall health of the Auto Industry. Sale of light vehicle in the U.S. increased for the fifth consecutive year in 2014, improving on the 6-year high achieved in 2013.

Sales continued to grow this year, with a 5.6% year-over-year increase to 3.95 million vehicles in the first quarter. Low fuel costs, an improving employment rate and reduced borrowing costs boosted sales. Hence, we believe that driven by a persistent rise in auto sales, Ally Financial should witness an improvement in Automotive Finance and Insurance divisions’ revenues.

However, we believe that the loss of an exclusive lease agreement with General Motors Company GM will negatively impact Ally Financial’s top line. Notably, management has been expecting a minimal impact of the same.

On the expense front, Ally Financial has been able to keep a check on its expenses, aided by streamlining activities. In Jan 2015, the company exited from international holdings by divesting its 40% stake in a Chinese joint venture to subsidiaries of General Motors – General Motors Financial Company, Inc. and GMAC UK PLC. Pertaining to this deal, the company is expected to record an after-tax gain of nearly $400 million in first-quarter 2015.

Nevertheless, non-interest expenses are anticipated to mount owing to a rise in compliance costs, but the rise will not likely dampen bottom-line growth. Also, as Ally Financial will likely experience a rise in auto-loan origination, we believe that provision for loan losses is expected to trend the higher side.

Notably, Ally Financial’s quarterly activities were not sufficient to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at 42 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Ally Financial is likely to beat the Zacks Consensus Estimate in the first quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for Ally Financial is -4.76%. This is because both the Most Accurate estimate stands below the Zacks Consensus Estimate.

Zacks Rank: Ally Financial’s Zacks Rank #3 increases the predictive power of ESP. But we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks to Consider

Here are a few finance stocks you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Earnings ESP for Santander Consumer USA Holdings Inc. SC is +4.41% and it has a Zacks Rank #1. The company is slated to report on Apr 28.

The Carlyle Group LP CG has an Earnings ESP of +22.81% and holds a Zacks Rank #3. It is expected to report on Apr 29.

World Acceptance Corp. WRLD has an Earnings ESP of +2.73% and a Zacks Rank #3. It is expected to report results on May 5.

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