Finding undervalued stocks before Wall Street gives them the credit they deserve is one way to maximize your investment returns. Sooner or later, the secret will get out, and you'll see gains.
Ally Financial (ALLY +0.89%) is a financial stock with several revenue streams that's trading at a serious discount. Here's why it's undervalued, and why it has high potential for growth.
A large product line with many opportunities
Ally is known for its auto lending business, but it operates several other businesses that round out a suite of financial technology solutions.
Image source: Getty Images.
Its biggest business is auto lending, which has more than 4 million auto loan customers and 2.5 million auto insurance customers.Ally is the largest auto lender in the U.S., with $105 billion in loan commitments as of the end of the first quarter. The company had more than $10 billion in auto loan originations in the first quarter, the highest level in more than five years.That was solid performance during a global car shortage brought on by chip shortages. The lowest car inventory in decades pushed new and used car sales to high levels, and Ally is getting a chunk of that business.
Its other large segment is digital consumer banking, which is also growing at a nice clip. Retail deposits were up 21% in Q1 to nearly $130 billion, which makes it a mid-size bank. Consumer banking customers were up 14% to 2.3 billion. Ally announced last week that is will completely eliminate overdraft fees for all of its accounts, and it is the first major bank to do that. That action shouldn't make a significant mark on its income statement, but it should attract new customers to its current 9 million.
Ally has other smaller divisions that make up the rest of its operations. Home lending is becoming a bigger business for Ally, and home loan originations grew 145% in the first quarter to $1.8 billion. Current customers accounted for 45% of loan originations, which highlights the company's ability to build a strong organic growth model. Corporate loans reached a record high, also at $1.8 billion.
Brokerage is a smaller player, with close to half a million customers and $14.5 billion in assets. But as it rolls out a more competitive consumer banking model and develops a fintech base for its customers, it can acquire more of its customer base for its brokerage services.
In other words, Ally is growing nicely, and it has further means to keep it up.
Why is it undervalued?
Across many traditional valuation metrics, Ally's stock is trading low. Shares are trading at a little over 9 times forward one-year earnings, which is low even for a bank. Tangible book value (TBV) came in at a little over $36 per share on an adjusted basis in Q1, which means the bank's ratio of price to TBV is an attractive 1.4.
Like other banks, Ally suffered at the beginning of the pandemic, when it had to move more money to cover potential losses, resulting in a net loss for the 2020 first quarter. But net income has increased in each successive quarter, up to $800 million in the 2021 first quarter, off of $1.9 billion in revenue.
As a smaller player in banking, the market may not be giving Ally the attention (or gains) it deserves. Ally stock gained 132% over the past year as of Wednesday's close and is trading around all-time highs, but it still sports a low overall valuation, with plenty more upside to come.
