Ally Financial Jumps After Analyst Sees Favorable Risk/Reward

Shares of diversified financial services company Ally Financial (ALLY) are outperforming broad market measures after a Piper Jaffray analyst sees solid risk Vs. reward in shares.

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AUTO HEADWINDS: Shares of Ally, which has a niche in the auto lending business, have been under pressure since late winter when signs of an auto slowdown became evident. In Late March, the company pointed out that several banks, including Ally, are "closely monitoring credit trends and adjusting pricing and/or underwriting," pointing to a "noticeable shift over past few months." Ally added that the auto finance market is "generally exhibiting price and risk discipline." In a note out in March, Morgan Stanley analyst Adam Jonas said the firm believes the decline in used car values may happen sooner than most analysts see, however the downturn "could also prove to be far more severe." Used car prices are a critical component to the algorithm of new car pricing as consumers will be likely to opt for a good value in a used car than pay a premium for a new one. According to a report from NADA, a division of JD Power, prices for used vehicles reversed what is typical of February as "used vehicles up to eight years old fell substantially last month, dropping 1.6% compared to January." The decline is in stark contrast to the 1% increase that was expected. With its first quarter results Ally reiterated its auto trepidation when it said, "We posted solid profitability in the first quarter, but it fell short of our expectations of delivering strong year-over-year earnings growth given softer used vehicle values and higher insurance weather losses."

RECENT POSITIVE COMMENTARY: Last week, speaking at the Bernstein Strategic Decisions Conference, Ally CEO Jeffrey Brown said the company was capped in auto and was pursuing more opportunities in the consumer side. Brown also noted that as far a subprime loans, a big concern to the industry lately, Ally is doing income verification for 65% of subprime auto loans. Brown noted that used car price decline are factored into model, while adding that the company was on a "powerful path."

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Disclosure: None. 


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