Ally Financial (ALLY) is scheduled to report second-quarter 2021 earnings on July 20.
The company provides various financial products and services to consumers, businesses, automotive dealers, and corporate customers, primarily in the United States and Canada.
Over the past year, shares of the bank holding company have jumped 135.8%, trading at $50. A solid Q2 results might propel the stock price upward, so let’s take a closer look at what analysts on the Street are expecting.
Q2 Expectations
For Q2, the Street expects Ally Financial to report adjusted EPS of $1.49 and revenues of $1.87 billion.
Meanwhile, the Earnings Whisper number, or the Street’s unofficial view on earnings, stands at $1.68 per share. (See ALLY stock charts on TipRanks)
Prior Quarter Snapshot
In the last-reported first quarter, adjusted revenues came in at $1.93 billion, and increased 37.2% year-over-year and outpaced the Street’s estimates of $1.74 billion. Also, net financing revenues were up 19.7% year-over-year to $1.4 billion, driven by lower funding costs, higher retail auto revenues and better gains on off-lease vehicles.
Net interest margin (NIM) was 3.16%, up 50 basis points (bps) year over year.
Meanwhile, adjusted earnings of $2.09 per share surpassed the Street’s estimates of $1.15.
Factors to Note
Ally Financial generates revenues from its various segments, namely Auto, Insurance, Corporate Finance and Mortgage.
Auto Finance remains the company’s biggest revenue segment. Within Auto Finance, consumer originations were $10.2 billion in Q1 and represented the highest level in over five years, while the credit performance remained solid.
In the automobile industry, the ongoing pandemic has caused significant supply chain disruptions. This has resulted in a scarcity of new cars due to chip shortage, boosting demand for secondhand vehicles. As a result, both new and used vehicle prices have reached all-time highs, presenting a significant opportunity for auto lenders like Ally, as higher prices imply larger loans and higher interest income.
Given that Ally generated 80% of its first-quarter pre-tax income from auto finance, the healthy trends in the auto industry is a significant indicator for the company’s future earnings. Given Ally’s huge network of car dealer relationships, any increase in new car sales should boost its revenues in the upcoming quarter.
Further, the consumer adoption of digital banking has accelerated over the past quarters. The trend is expected to continue in Q2, driven by increased demand for personalized services, continuing to benefit Ally Financial’s top line growth.
Coming to Ally’s new home loan market, home loan originations in Q1 were up 157% year-over-year. The company is expected to continue to gain from this market as Ally has been making efforts to apply its digital lending approach to mortgages. In a bid to expand its presence in this rapidly growing market, the company also plans to increase its retail offerings in the near term.
To add to these, total financing revenues and other interest income are expected to have improved in the upcoming quarter, driven by an expected increase in interest and fees on finance receivables and loans (the major component of interest income).
In the last earnings call, Ally CEO Jeffrey J. Brown sounded positive about performing well in the near future. Brown said, “The impressive momentum we carried into 2021 was fueled by our leading and adaptable auto and digital banking platforms and a culture centered around our promise to ‘Do It Right’ for our customers, employees and communities.”
He added, “This disciplined approach, along with our focus on generating long-term value for all our stakeholders, guides our strategy and positions us for continued success.”
On a less positive one, Ally Financial has seen a steady increase in spending over the last few quarters. Overall costs are anticipated to have remained high in the second quarter as it launches new goods and strives to grow into additional areas of business. This is expected to have impacted profits in the upcoming quarter.
Analyst Recommendations
Ahead of the second-quarter earnings announcement, Jefferies analyst John Hecht reiterated a Buy rating on the stock but increased the price target to $60.00 from $58.00. This implies 19.8% upside potential to current levels.
Hecht remains positive about the company based on Ally Financial’s “solid credit trends and a well-reserved balance sheet, NIM expansion, and better volumes. Furthermore the analyst said, “Given its more liability sensitive balance sheet, the analyst consider the current rate environment to be more favorable for ALLY than other banks/spec finance companies.”
Arfstrom expects Ally Financial’s earnings per share to come in at $2.12 for Q3.
Another analyst Jon Arfstrom of RBC Capital reiterated the stock’s price target of $57 (13.8% upside potential) and a Buy rating.
Consensus among analysts is a Strong Buy based on 7 unanimous Buys. The average ALLY price target of $61.57 implies 22.9% upside potential from the current levels.
ALLY scores a “Perfect 10” from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
