Citi has maintained its Buy rating on shares of Ally Financial (NYSE: NYSE:ALLY) with a price target of $50.00.
The firm recognized that Ally Financial's performance has lagged due to management's recent remarks on weaker credit trends observed in the third quarter.
However, Citi sees the current situation as an opportunity for investors, noting several key factors that could lead to improvements for the company.
According to Citi's assessment, the last six quarters of Ally Financial's originations are expected to benefit from curtailment, which should help offset the increased loss outlook over the next 12-18 months resulting from credit challenges in the 2022 and first quarter of 2023 vintages. Citi anticipates a significant improvement in these short-duration assets by 2026.
Despite the anticipated net interest margin (NIM) pressure in the second half of 2024, Citi remains confident in Ally Financial's liability sensitivity, forecasting an NIM above 4% in 2026. This outlook is supported by a detailed note provided by the firm on the expected progression of NIM.
Citi also projects approximately 20% tangible book value (TBV) growth for Ally Financial, reaching $42 by 2025. At present, the stock is trading at 0.8 times the projected fourth quarter 2025 TBV, with a mid-teens return on tangible common equity (ROTCE) anticipated for 2026. The firm suggests that the recent sell-off in Ally Financial's shares is more reflective of the market's reaction to open-ended messaging rather than the company's fundamentals.
In other recent news, Ally Financial's Q2 2024 earnings report showed a 15% increase in revenue and an adjusted EPS of $0.97. However, the company has also faced increased credit challenges in its automotive retail sector, leading to higher delinquencies and net charge-offs. This resulted in Ally Financial selling its lending business to Synchrony Financial (NYSE:SYF) in a deal that included loan receivables valued at $2.2 billion.
TD Cowen expressed concerns over deteriorating credit conditions and shrinking margins, lowering the price target for Ally Financial from $45.00 to $37.00, while maintaining a Hold rating.
Similarly, BTIG downgraded Ally Financial from Buy to Neutral, citing a lack of short-term catalysts for the stock's performance.
In contrast, several firms maintained a positive outlook. BofA Securities revised its price target on Ally Financial shares to $37.00 from the previous $46.00, but retained a Buy rating. Goldman Sachs and Citi also maintained Buy ratings, with Goldman Sachs analyst Ryan Nash highlighting the long-term value of the shares despite near-term challenges.
InvestingPro Insights
Adding to Citi's bullish outlook on Ally Financial, recent data from InvestingPro provides additional context for investors. Despite the company's stock struggling in the short term, with a 19.03% decline over the past month, Ally Financial maintains a solid financial foundation. The company's P/E ratio of 15.03 and price-to-book ratio of 0.92 suggest that the stock may be undervalued, aligning with Citi's view of a potential opportunity for investors.
InvestingPro Tips highlight that Ally Financial has maintained dividend payments for 9 consecutive years, demonstrating a commitment to shareholder returns. This is particularly noteworthy given the current dividend yield of 3.43%. Additionally, analysts predict the company will remain profitable this year, supporting Citi's positive outlook on the company's future performance.
It's worth noting that InvestingPro offers 5 additional tips for Ally Financial, providing investors with a more comprehensive analysis of the company's prospects. To gain access to these insights and make more informed investment decisions, consider exploring the full range of data available on InvestingPro.
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