Ally Financial (ALLY) is an online bank that makes most of its money lending to used car buyers via dealers. The company is very profitable, pays a dividend, and buys back shares. It looks too cheap at 4.5x earnings.
For example, analysts now project that its earnings for both 2022 and 2023 will be $7.78 per share. At today's price of $34.79 as of June 28, which is down 28.5% YTD, the forward multiple is just 4.47x.
Here is what that means. A competitor could theoretically pay cash for Ally Financial and recoup its money within 4.5 years. Moreover, its tangible book value is $37.79. That implies that the company could be liquidated and investors would still make a profit.
In addition, the company pays a 30-cent quarterly dividend, or $1.20 annually, giving it a 3.22% annual dividend yield.
On top of this management recently repurchased $584 million of its shares in Q1. At that pace, it will buy back $2.336 billion of its market value, which is just $11.36 billion. In other words, it is on track to buy back 20.5% of its market cap in one year. In three years, it could buy back 60%. That is probably the single most impressive proof that management thinks its stock is too cheap.
Why Is ALLY Stock So Cheap?
Investors are scared that the used car market, with its huge recent gains in the past year or so, will deflate. That could significantly hurt its profits, especially if there is a recession and the company experiences large loan losses.
Recently Joseph Carlson did an excellent job in his recent YouTube video describing the Ally Financial conundrum for investors. He shows how the company is well-financed, with very little debt, and is super profitable. He shows that 70% of the company's profits come from lending to buyers of used cars, mainly through dealers. He shows that the average price of used cars has risen from about $20K to now about 30.8K on an index basis. If the value of used cars starts to deflate then the value of its loans will fall, and so will its profits.
However, he also shows that management doesn't really believe that this is going to happen any time soon. In fact, it may take a long time for this scenario to play out. That means the company will continue to stay profitable, probably longer than investors assume now. He refers to a recent KPMG study that the imbalances in the used car market will eventually work out - but over time. Moreover, its allowance for loan losses is very high at 2.63%, up significantly over the past several years.
That should give investors some comfort. Value investors who like to make contrarian investments will want to take a careful look at ALLY stock.
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