What happened
Ally Financial (ALLY +8.10%) saw its stock price fall 10.2% this week on third-quarter earnings that did not meet analysts' expectations. The stock price stood at $29.25 per share at the market close last Friday and dropped to $26.26 as of the closing bell on Thursday. Ally is down roughly 45% year to date.
The major indexes were all up this week, with the S&P 500 and the Dow Jones Industrial Average gaining approximately 2.2% through Thursday's close, while the Nasdaq was up 3.2%. This does not include Friday, when the markets were up significantly across the board.
So what
Ally Financial, a leading online bank that specializes in car loans, endured a difficult third quarter, as it missed revenue and earnings estimates.
Ally posted net income of $272 million in the quarter, which was 40% lower than the same quarter a year ago. Adjusted earnings per share (EPS) was $1.12, which was down 48% year over year. Analysts had estimated an adjusted EPS of $1.73 -- so it was a big miss.
Revenue was up 2% year over year to $2 billion, but it was below the consensus estimate of $2.15 billion.
NYSE: ALLY
Key Data Points
One factor that hampered Ally in the quarter was the impairment, or permanent value reduction, on a nonmarketable equity investment related to Ally's mortgage business. This had a $0.33 per-share impact on EPS. The other factor was a higher provision for credit losses. The company set aside $438 million in the quarter, up from $76 million in the third quarter of 2021. This was done to protect against potential recessionary conditions in the months ahead, and due to higher auto loan growth.
Consumer auto originations hit $12.3 billion, marking the highest third quarter since 2006. That included $7.9 billion, or 64%, of used retail volume. Overall, loans were up $4 billion in the quarter, reflecting a $133 million provision build. Net charge-offs ticked up 78 basis points year over year to 1.05%.
Now what
The net interest margin (NIM) was 3.8% in the quarter, up 15 basis points year over year. On the earnings call, CEO Jeff Brown projected a NIM of 3.5% in the fourth quarter, reflecting the economic pressures caused by inflation, higher interest rates, slower economic growth, and production and supply chain issues within the auto market. Also, inflated used car prices are expected to come down.
"We see $2 billion to $3 billion of loan growth expected in the fourth quarter across our consumer and corporate finance portfolios, so reserves will increase as we grow the balance sheet," Brown said on the earnings call. He anticipates an adjusted EPS of about $1 per share in the fourth quarter.
Ally's book value has dropped sharply, and now it has a price-to-book ratio of 0.78, which means it is trading below book value. Its forward price-to-earnings ratio is just 3.75.
I like the stock long-term because of its efficiency and leadership in the auto finance market, as well as its dirt cheap valuation. But the near term should be challenging, given the economic environment.
