Ally Financial stock upgraded as Raymond James sees limited further downside

On Monday, Raymond James revised its rating for Ally Financial (NYSE: NYSE:ALLY) stock, moving from Underperform to Market Perform. The adjustment follows a period of underperformance in Ally's shares relative to broader market indices. Since January, Ally's stock has seen a modest increase of 2%, compared to a 28% rise in the BKX Bank Index and a 25% increase in the S&P 500.

The firm's decision to upgrade Ally Financial is based on the belief that the stock has already experienced the bulk of its underperformance. Despite the upgrade, the firm maintains a cautious stance on Ally Financial, anticipating more potential downside to earnings per share (EPS) estimates than upside.

The initial bearish thesis from Raymond James centered on the bank's optimistic projections for its net interest margin (NIM) and retail auto net charge-offs (NCOs). However, on Friday, Ally Financial acknowledged a negative revision to its outlook for both metrics.

Additionally, the current lower interest rate environment has allowed Ally Financial to recapture some of its accumulated other comprehensive income (AOCI), which has contributed to an increase in its generally accepted accounting principles (GAAP) tangible book value (TBV).

The firm noted that without its current AOCI, Ally Financial's stock would be trading at nearly 70% of TBV, a valuation that suggests a stressed scenario for the bank. This reassessment of the stock's value informed the decision to upgrade its rating to Market Perform.

In other recent news, Ally Financial reported its third-quarter 2024 earnings, which were influenced by significant tax credits related to electric vehicle lease volumes. The company disclosed an adjusted earnings per share (EPS) of $0.95, despite facing challenges such as interest rate volatility and inflationary pressures.

The auto segment originated $9.4 billion in consumer loans, while retail deposits totaled $141 billion, marking a decline of $600 million in the quarter.

Ally Financial also announced a quarterly dividend of $0.30 for Q4 2024. The company updated its 2024 net interest margin outlook to approximately 3.2%, anticipating a 50 basis point Federal Reserve rate decrease by year-end.

Despite these challenges, the company's insurance segment reached a record $384 million in premiums, and EV lease originations accounted for 12% of total origination volume.

The management expressed confidence in achieving mid-teens returns over time, despite current economic pressures. These recent developments reflect the company's ongoing efforts to navigate the current economic environment through disciplined capital deployment and expense management.

InvestingPro Insights

To complement Raymond James' analysis of Ally Financial (NYSE: ALLY), recent data from InvestingPro offers additional context. Despite the stock's modest 2% year-to-date increase, Ally has demonstrated a robust 50.76% total return over the past year, indicating significant recovery potential. This aligns with Raymond James' view that the stock may have already experienced the bulk of its underperformance.

The company's P/E ratio of 13.94 and Price to Book ratio of 0.86 suggest that the stock might be undervalued, potentially supporting the upgrade to Market Perform. Additionally, Ally's dividend yield of 3.43% could be attractive to income-focused investors, especially considering the InvestingPro Tip that the company has maintained dividend payments for 9 consecutive years.

However, investors should note that Ally's revenue growth has been negative, with a -8.04% decline in the last twelve months. This aligns with Raymond James' caution regarding potential downside to EPS estimates. An InvestingPro Tip also indicates that 8 analysts have revised their earnings downwards for the upcoming period, suggesting ongoing challenges.

For a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into Ally Financial's prospects. These additional tips, along with real-time metrics, can help investors make more informed decisions about this financial stock in the current market environment.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.