Ally Financial: Potentially Undervalued And Benefits From Strong Auto Segment Growth

Overview - Ally Financial has seen a stock price increase of over 46% since October 2023, with the current dividend yield at 3.3%, down from 4.6% [1] - The company operates primarily in digital financial services, focusing on auto lending, insurance, mortgage lending, and corporate finance [1] - Interest rate changes are expected to be a significant catalyst for Ally's performance in 2024, with a maintained Buy rating and anticipated price appreciation [1] Interest Rate Sensitivity - The Federal Reserve is expected to cut rates mid-year, which may lead to a dramatic price increase for Ally [3] - Ally's stock price has historically reacted inversely to interest rate changes, with price spikes during low rates and dips when rates rise [3] Financial Performance - Ally reported a revenue of $8.2 billion for 2023, a 22$14 billion, a 48% year-over-year increase, with 92% of deposits being FDIC insured [5] Customer Retention and Demographics - Ally achieved a customer retention rate of 97% in the last quarter, with younger generations (Gen Z and Millennials) making up a significant portion of new deposits [5] - The Ally app facilitates the use of multiple services, enhancing customer engagement and retention [5] Earnings and Cost Management - Ally reported an EPS of $0.16 and total net revenue of$2.1 billion, while reducing Risk-Weighted Assets by $4 billion [6] - The company has implemented cost-saving measures, achieving$80 million in annual savings through staff reductions [6] Auto Segment Performance - Loan originations in the auto segment totaled $9.6 billion, a 10.81$0.30 per share, with a payout ratio of 39% and expectations for a potential increase by the end of the year [8] - Ally's dividend has grown over 75% since 2019, outperforming major banks [9] - A DCF calculation suggests a fair price value of $52.17 per share by the end of 2024, indicating a potential upside of about 43% [10] Risk Profile - Ally's loan-to-deposit ratio is currently at 98%, indicating efficient use of customer deposits for lending [12] - The company has improved its financial picture over the last decade, despite a higher loan-to-deposit ratio compared to the average for US banks [14] Conclusion - Ally Financial is still considered a buy, with strong growth prospects across its business segments, particularly in auto lending [15] - The company is well-positioned for future growth, with a conservative payout ratio and potential for dividend increases [15]