What happened
Shares of Ally Financial (ALLY 1.17%) were down 5.2% as of 10:28 a.m. ET on Wednesday after reporting worse-than-expected results for the third quarter.
The stock has fallen 43% year to date with the broader market downturn. The stock is trading at a low price-to-earnings ratio, which has attracted a small investment by Warren Buffett's Berkshire Hathaway. Are Ally's latest results good enough to justify buying the stock at these lows?
So what
Adjusted revenue came in at $2.09 billion, below expectations for $2.16 billion. More concerning was the big miss on the bottom line, where adjusted earnings per share of $1.12 was well short of the average estimate of $1.73.
Part of the shortfall in earnings was an impairment in nonmarketable equity investments related to Ally's mortgage business, which cut $0.33 out of earnings. Also, the company set aside higher provisions for loan losses as a result of recent loan growth in auto finance. The higher provisions are designed to protect the company if the economy dips into a recession, making it difficult for folks to make their loan payments.
The good news is that Ally continues to earn a high return on tangible equity of 17% in the quarter, although it has fallen from 24% in the year-ago quarter.
Now what
The high return on tangible equity makes the stock's low valuation look attractive. The stock currently trades at a price-to-earnings ratio of 3.8 based on this year's consensus earnings estimate. It also trades at a cheap-looking 0.78 times tangible equity, or book value.
On the other hand, adjusted tangible book value per share fell 12% over the previous quarter, which makes Ally's return on equity less meaningful. With the company seeings its equity fall as the economy weakens, the stock may not be as undervalued as it looks.
