On Dec 2, 2016, we issued an updated research report on the Michigan-based diversified financial services company, Ally Financial Inc. ALLY. The company’s high level of leverage keeps us apprehensive. On the other hand, growth in key revenue sources, recent expansion initiatives and steady capital deployment activities look encouraging.
Ally Financial’s capital structure is leveraged by a high level of debt. This could possibly restrict the company’s access to additional funds required for working capital, capital expenditures and expansion initiatives like acquisition. Notably, as of Sep 30, 2016, the company’s long-term debt constituted around 40% of total assets, while interest expense on long-term debt was about 21% of total financing revenue and other interest income.
The company provides a broad array of financial products and services primarily to automotive dealers and their customers, which makes it largely dependant on the performance of the Auto industry as a whole. The company expects to witness higher losses and provisions regarding retail auto portfolio in 2017.
The company’s non-interest expenses have depicted a downward trend for the past few years. Further, launch of products and initiatives undertaken to enhance profitability will likely result in lower incremental savings in the near term.
However, growth in the company’s net financing revenue remains a major tailwind, which is one of the key sources of revenue for the company. Notably, management anticipates net financing revenue to grow over the next few years and reach a run rate of around $5 billion annually. Moreover, as the company enters into second-half 2017, revenue growth is expected to outpace expense rise, providing a positive operating leverage over the next few years.
With an aim to expand its banking products, Ally Financial will take its mortgage business online by fourth-quarter 2016. Further, the company is planning for an integrated customer launch in first-quarter 2017. The company’s efforts to enhance its digital offerings, wealth management and online brokerage related to the credit card offering are likely to aid in diversifying its revenue base.
Ally’s Financial’s shares have gained around 5% so far this year on the NYSE, underperforming the growth of 12.6% for the Zacks-categorized Consumer Loan industry. The Zacks Consensus Estimate for the stock declined 2.2% over the last 60 days for the current year.
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Currently, Ally Financial carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Some better-ranked stocks include CatchMark Timber Trust, Inc. CTT and Regional Management Corp. RM, each carrying a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for CatchMark narrowed from a loss of 30 cents to a loss of 26 cents over the last 60 days for the current year. For Regional, the Zacks Consensus Estimate inched up around 1% to $2.03 for the same time frame.
The Zacks Consensus Estimate for Capital One Financial Corp. COF moved up by nearly 1% to $7.29 over the last 60 days for the current year. Capital One carries a Zacks Rank #3 (Hold).
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