Has Ally Financial (ALLY) Fallen Too Far After Recent Share Price Weakness?

• If you are looking at Ally Financial and wondering whether the current share price offers solid value, you are not alone. This article is here to walk through what that price might actually represent.
• The stock closed at US$38.07, with returns of 3.5% decline over 7 days, 10.0% decline over 30 days, 16.8% decline year to date, 13.4% over 1 year, 63.7% over 3 years and 1.8% decline over 5 years, which may have shifted how some investors are thinking about both risk and opportunity.
• Recent news around Ally Financial has focused on its role as a digital focused consumer finance platform and on how it is positioned within the broader US diversified financials sector. Coverage has also touched on regulatory and competitive developments that investors often watch closely when share prices move, giving useful context for the returns you see above.
• On our valuation checks, Ally Financial earns a score of 5 out of 6. We will unpack this using a mix of valuation methods, and then finish by looking at an even more rounded way to think about what the stock might be worth.

Ally Financial delivered 13.4% returns over the last year. See how this stacks up to the rest of the Consumer Finance industry.

Approach 1: Ally Financial Excess Returns Analysis

The Excess Returns model looks at how efficiently Ally Financial turns shareholder capital into earnings, then compares that to the return investors require. Instead of focusing on cash flows, it looks at whether the company earns more on its equity than its estimated cost of equity.

For Ally Financial, book value is $42.70 per share and the stable book value estimate is $49.07 per share, based on weighted future book value estimates from 9 analysts. Stable EPS is $5.90 per share, sourced from weighted future return on equity estimates from the same analyst group. The average return on equity is 12.03%.

The model assumes a cost of equity of $5.78 per share, which leads to an excess return of $0.13 per share. That excess, applied to the stable book value over time, is used to arrive at an estimated intrinsic value. On this basis, the Excess Returns valuation suggests Ally Financial is 24.7% undervalued relative to the current share price of US$38.07.

Result: UNDERVALUED

Our Excess Returns analysis suggests Ally Financial is undervalued by 24.7%. Track this in your watchlist or portfolio, or discover 49 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Ally Financial.

Approach 2: Ally Financial Price vs Earnings

For a profitable business like Ally Financial, the P/E ratio is a straightforward way to link what you pay per share to the earnings the company is generating. It helps you see how many dollars of price the market is attaching to each dollar of profit.

What counts as a “fair” P/E usually reflects two big things: how quickly earnings are expected to grow and how risky those earnings are. Higher growth or lower perceived risk can support a higher P/E, while slower growth or higher risk can justify a lower one.

Ally Financial currently trades on a P/E of 15.86x. That sits above the Consumer Finance industry average P/E of 7.94x, and below the peer group average of 22.29x. Simply Wall St’s Fair Ratio for Ally Financial is 18.23x, a proprietary estimate of what the P/E might be given factors such as earnings growth, industry, profit margins, market cap and key risks.

This Fair Ratio can be more informative than a simple comparison with peers or the industry because it adjusts for Ally Financial’s own characteristics rather than assuming all companies should trade on the same multiple. With the current P/E of 15.86x below the Fair Ratio of 18.23x, this approach points to the shares looking undervalued on earnings.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Ally Financial Narrative

Earlier we mentioned that there is an even better way to understand valuation. Simply Wall St’s Narratives let you attach a clear story to your numbers by linking what you believe about Ally Financial’s future revenue, earnings and margins to a forecast, and then to a Fair Value that you can compare with today’s price to help decide if it looks like a buy or a sell. All of this happens within the Community page, where Narratives are updated as new news or earnings arrive and where different investors can take very different views, such as one assigning Ally a Fair Value of about US$50.00 and another closer to US$37.00 or US$56.49, depending on how they see the same business.

Do you think there’s more to the story for Ally Financial? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data
and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your
financial situation. We aim to bring you long-term focused analysis driven by fundamental data.
Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Simply Wall St has no position in any stocks mentioned.

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