Ally Financial shares target cut by TD Cowen on credit, margin concerns

On Monday, TD Cowen maintained a Hold rating on Ally Financial (NYSE: NYSE:ALLY) but lowered the price target from $45.00 to $37.00 for the shares.

The adjustment reflects concerns over deteriorating credit conditions and shrinking margins that are expected to impact the company's performance.

The firm revised its earnings per share (EPS) estimates for 2024 to $2.55 and for 2025 to $3.85, a decrease from the previous estimates of $3.65 and $5.50, respectively.

The revision in the price target and EPS estimates is attributed to the financial challenges borrowers are facing in the current economic climate. These difficulties have led to higher than anticipated delinquencies (DQs) and net charge-offs (NCOs) at Ally Financial. Moreover, the company has also experienced a reduction in net interest income (NII).

TD Cowen anticipates that the upcoming 50 basis point rate cut will exert additional pressure on Ally Financial's margins in the fourth quarter of 2024. Despite these headwinds, the firm has reiterated its Hold rating on the stock.

The new price target of $37.00 is based on a 10x multiple of the firm's 2025 EPS estimate and is approximately equal to Ally Financial's year-end tangible book value (TBV). This revised target reflects the firm's cautious outlook on the company's near-term financial prospects amid a challenging operating environment.

In other recent news, Ally Financial has faced several significant developments. The company reported a 15% increase in revenue and an adjusted EPS of $0.97 in its Q2 2024 earnings report.

However, Ally Financial has been dealing with increased credit challenges in its automotive retail sector, leading to a rise in delinquencies and net charge-offs. This prompted the company to sell its lending business to Synchrony Financial (NYSE:SYF) in a transaction that included loan receivables valued at $2.2 billion.

BTIG has downgraded Ally Financial from Buy to Neutral, citing a lack of short-term catalysts that may drive the stock's performance. In contrast, BofA Securities revised its price target on Ally Financial shares to $37.00 from the previous $46.00, while maintaining a Buy rating.

Goldman Sachs analyst Ryan Nash also maintained a Buy rating, despite the company's challenging path to achieving a 15% return on tangible common equity.

Citi analyst retained a Buy rating, viewing the stock's current price as an attractive entry point for investors. Evercore ISI maintained its In Line rating due to near-term margin pressures, while Barclays maintained its Equalweight rating due to increased credit challenges amidst a weakening macroeconomic environment.

Lastly, RBC Capital reinstated coverage with an Outperform rating, suggesting that the company's credit challenges are manageable.

InvestingPro Insights

Following the recent adjustments by TD Cowen, a deeper look into Ally Financial's real-time metrics reveals a mixed financial landscape. According to InvestingPro Data, Ally Financial has a current market capitalization of $10.51 billion and a P/E ratio of 14.78, which adjusts down to 12.81 when considering the last twelve months as of Q2 2024. Despite a decline in revenue growth of -9.63% over the same period, the company has maintained a solid operating income margin of 12.82%.

InvestingPro Tips highlight that while analysts have revised their earnings expectations downwards for the upcoming period, and the stock has performed poorly over the last month with a one-month price total return of -20.88%, Ally Financial has managed to maintain dividend payments for nine consecutive years. The dividend yield stands at a notable 3.48%, with the last dividend having an ex-date of August 1, 2024. Additionally, analysts remain optimistic about the company's profitability in the current fiscal year and note that Ally has been profitable over the last twelve months.

For investors considering Ally Financial's stock, the InvestingPro platform offers further insights and tips, with a total of 6 additional InvestingPro Tips available to help guide investment decisions. The current fair value assessments from analysts and InvestingPro stand at $43.50 and $41.94, respectively, suggesting potential upside from the previous close price of $34.48.

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