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Will Ally Financial (ALLY) Stock Disappoint in Q2 Earnings?
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Ally Financial Inc. (ALLY - Free Report) is slated to announce second-quarter 2016 results on Jul 26, before the market opens.
Last quarter, a significant rise in provision for loan losses and higher operating expenses led Ally Financial’s earnings to lag the Zacks Consensus Estimate. However, a rise in revenues acted as a tailwind.
The earnings miss translated into dismal performance of the stock during the three-month period ended Jun 30, 2016, with shares declining more than 10%. Also, analysts don’t seem to be happy with Ally Financial’s business activities in the just concluded quarter, as evident from a 2% fall in earnings estimate over the last 30 days. Notably, the Zacks Consensus Estimate of 52 cents remained stable over the last seven days.
Nonetheless, Ally Financial boasts a decent earnings surprise history, as evident from the chart below:
Will Ally Financial be able to beat estimates this earnings season or will higher provisions hurt the results again? Let us check how things have shaped up for this announcement.
Factors Influencing Q2 Results
Higher Provisions to Continue: Ally Financial has been witnessing a persistent rise in provision for loan losses. Over the last five years, provisions have increased at a CAGR of 44.8% (2011–2015), with the same trend expected to continue in this quarter as well. Provisions are expected to increase primarily due to higher loan balances.
Further, total charge-offs on the retail auto loan portfolio are projected to witness a moderate increase due to mix optimization. However, the impact of the same is expected to be mitigated by improved yields.
Rise in Expenses: Till now, Ally Financial has been able to keep a check on its expenses, aided by streamlining activities. Nonetheless, inorganic growth strategy, new products launches and re-entry in to the mortgage business are likely to make incremental savings difficult, going forward. Similar to the last reported quarter, the company should witness an increase in operating expenses.
Revenue Growth to Continue: Primarily dealing in auto loans, the performance of Ally Financial is mainly dependent on the overall health of the auto industry. The Fed’s decision to delay interest rate hikes should extend the current sales cycle, which will help the auto industry to continue leading the overall U.S. economic recovery.
Ally Financial should witness an improvement in Automotive Finance and Insurance divisions’ revenues in the quarter driven by a consistent rise in auto sales.
Also, management expects retail loan yield to rise to some extent in the quarter driven by a balanced credit mix. However, this could be offset by a continued decline of around $1 billion per quarter in the company’s higher yielding lease portfolio.
Earnings Whispers
Our proven model does not conclusively show that Ally Financial is likely to beat the Zacks Consensus Estimate in the second quarter. This 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 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 52 cents.
Zacks Rank: Ally Financial has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are a few finance stocks that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Cullen/Frost Bankers, Inc. (CFR - Free Report) has an Earnings ESP of +0.96% and a Zacks Rank #3. It is scheduled to report on Jul 27.
LPL Financial Holdings Inc. (LPLA - Free Report) , which is expected to report on Jul 28, has an Earnings ESP of +2.33% and a Zacks Rank #3.
Federated Investors, Inc. has an Earnings ESP of +2.13% and a Zacks Rank #3. The company is slated to release results on Jul 28.
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Will Ally Financial (ALLY) Stock Disappoint in Q2 Earnings?
Ally Financial Inc. (ALLY - Free Report) is slated to announce second-quarter 2016 results on Jul 26, before the market opens.
Last quarter, a significant rise in provision for loan losses and higher operating expenses led Ally Financial’s earnings to lag the Zacks Consensus Estimate. However, a rise in revenues acted as a tailwind.
The earnings miss translated into dismal performance of the stock during the three-month period ended Jun 30, 2016, with shares declining more than 10%. Also, analysts don’t seem to be happy with Ally Financial’s business activities in the just concluded quarter, as evident from a 2% fall in earnings estimate over the last 30 days. Notably, the Zacks Consensus Estimate of 52 cents remained stable over the last seven days.
Nonetheless, Ally Financial boasts a decent earnings surprise history, as evident from the chart below:
ALLY FINANCIAL Price and EPS Surprise
ALLY FINANCIAL Price and EPS Surprise | ALLY FINANCIAL Quote
Will Ally Financial be able to beat estimates this earnings season or will higher provisions hurt the results again? Let us check how things have shaped up for this announcement.
Factors Influencing Q2 Results
Higher Provisions to Continue: Ally Financial has been witnessing a persistent rise in provision for loan losses. Over the last five years, provisions have increased at a CAGR of 44.8% (2011–2015), with the same trend expected to continue in this quarter as well. Provisions are expected to increase primarily due to higher loan balances.
Further, total charge-offs on the retail auto loan portfolio are projected to witness a moderate increase due to mix optimization. However, the impact of the same is expected to be mitigated by improved yields.
Rise in Expenses: Till now, Ally Financial has been able to keep a check on its expenses, aided by streamlining activities. Nonetheless, inorganic growth strategy, new products launches and re-entry in to the mortgage business are likely to make incremental savings difficult, going forward. Similar to the last reported quarter, the company should witness an increase in operating expenses.
Revenue Growth to Continue: Primarily dealing in auto loans, the performance of Ally Financial is mainly dependent on the overall health of the auto industry. The Fed’s decision to delay interest rate hikes should extend the current sales cycle, which will help the auto industry to continue leading the overall U.S. economic recovery.
Ally Financial should witness an improvement in Automotive Finance and Insurance divisions’ revenues in the quarter driven by a consistent rise in auto sales.
Also, management expects retail loan yield to rise to some extent in the quarter driven by a balanced credit mix. However, this could be offset by a continued decline of around $1 billion per quarter in the company’s higher yielding lease portfolio.
Earnings Whispers
Our proven model does not conclusively show that Ally Financial is likely to beat the Zacks Consensus Estimate in the second quarter. This 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 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 52 cents.
Zacks Rank: Ally Financial has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are a few finance stocks that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Cullen/Frost Bankers, Inc. (CFR - Free Report) has an Earnings ESP of +0.96% and a Zacks Rank #3. It is scheduled to report on Jul 27.
LPL Financial Holdings Inc. (LPLA - Free Report) , which is expected to report on Jul 28, has an Earnings ESP of +2.33% and a Zacks Rank #3.
Federated Investors, Inc. has an Earnings ESP of +2.13% and a Zacks Rank #3. The company is slated to release results on Jul 28.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>