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Ally Financial (ALLY) Up 7.2% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Ally Financial (ALLY - Free Report) . Shares have added about 7.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Ally Financial due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Ally Financial Q4 Earnings & Revenues Beat Estimates, Costs Up Y/Y

Ally Financial’s fourth-quarter 2020 adjusted earnings of $1.60 per share handily surpassed the Zacks Consensus Estimate of $1.05. Also, the bottom line surged 68.4% from the year-ago figure.

Results benefited from growth in revenues and lower provisions, partly offset by higher expenses. Further, the balance sheet position remained strong during the quarter.

After considering non-recurring items, net income available to common shareholders (on a GAAP basis) was $687 million or $1.82 per share, up from with $387 million or 99 cents per share in the prior-year quarter.

In 2020, adjusted earnings per share of $3.03 declined 18.5% year over year. Net income available to common shareholders (on a GAAP basis) was $1.09 billion or $2.88 per share, down from $1.72 billion or $4.34 per share in 2019.

Revenues Improve, Expenses Rise

Total net revenues for the reported quarter were $1.98 billion, up 20.6% year over year. The figure also surpassed the Zacks Consensus Estimate of $1.66 billion.

 In 2020, total net revenues grew 4.6% from the prior year to $6.69 billion.

Net financing revenues were up 12.7% from the prior-year figure to $1.30 billion. The rise was driven by higher gains on off-lease vehicles, higher retail auto revenues and lower funding costs. These were partially offset by higher mortgage premium amortization and lower commercial auto portfolio balance and yield.

Adjusted net interest margin was 2.92%, up 26 basis points (bps) year over year.

Total other revenues of $678 million improved 39.2%.

Total non-interest expenses were up 16.3% to $$1.02 billion. The upswing stemmed from a rise in all cost components.

Adjusted efficiency ratio at the end of the fourth quarter was 49.8%, up marginally from 49.4% in year-ago period. A rise in efficiency ratio indicates deterioration in profitability.

Credit Quality: Mixed Bag

Non-performing loans of $1.52 billion as of Dec 31, 2020, were up 46.9% year over year. However, net charge-off rate was 0.67%, down 24 bps. Moreover, provision for loan losses declined 63% to $102 million.

Balance Sheet Strong, Capital Ratios Improve

Total net finance receivables and loans amounted to $115.3 billion as of Dec 31, 2020 increasing marginally from the third quarter. Deposits totaled $137 billion, up 1.6%.

As of Dec 31, 2020, total capital ratio was 14.1%, up from 12.8% in the prior-year quarter. Tier I capital ratio was 12.4%, up from 11.2% as of Dec 31, 2019.

Outlook

Management expects organic loan growth to continue in the near term.

The company expects new expansions of more than 3% to drive net financing revenue growth in the mid-teens rate on a year-over-year basis.

Adjusted other revenues are anticipated to increase steadily, driven by consumer offerings and ongoing insurance expansion.

On the expectations of stable asset yields, declining cost of funds and liability management; NIM will likely continue to expand in 2021 and beyond.

Retail auto origination yields in 2021 are expected in the mid 6% range and used-car values are expected to decline 3% on a yearly basis.

NCOs are projected to reach its peak in 2021 but then stabilize in 2022 and 2023.

The company expects to deliver positive operating leverage and improvement in efficiency in 2021.

It expects return on tangible common equity (ROTCE) to increase to 12% in 2021 and then expand to mid-teens in 2022 and 2023.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 9.09% due to these changes.

VGM Scores

At this time, Ally Financial has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Ally Financial has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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