ALLY - Ally Financial

[lagniappe]

I'm considering taking a position in the name.

 

Investment merits include the following:

 

Turnaround thesis - lower operating costs through refinancing options, etc.

Gov't exiting its position (which could put selling pressure in the short-term until it exits completely)

Low multiple (estimates of TBV) relative to its peers (CAAC)

Replacement cycle just beginning (in contrast to some reports...see Citi research on GM)

High auto inventory supports the notion of further auto financing loan growth

Higher interest rates could prove profitable for the bank as it expands to other loan products other than autos (although higher rates could dampen auto loan demand-possibly depending on magnitude and whether it's over a short time frame)

 

Just curious if anyone has considered this opportunity and whether there's strength in the merits listed above relative to potential downside risks.

[siddharth18]

No position here - just wondering what you are referring to with that "CAAC" peer.

[morningstar]

He means CACC, another auto lender (which is focused on subprime). However I think the economics of Ally are quite different as a bank from CACC and looking to compare TBV multiples is not going to be very effective. I think ALLY looks a little cheap on a P/E basis as well, however.

[muscleman]

I can't find the symbol in google finance. Weird.  ::)

I have been watching this since Dan Leob took a stake a few months ago, and I have my main checking account with Ally Bank since last November.

I am not sure if I would buy now though. I want a higher Mos :)

[siddharth18]

He means CACC, another auto lender (which is focused on subprime). However I think the economics of Ally are quite different as a bank from CACC and looking to compare TBV multiples is not going to be very effective. I think ALLY looks a little cheap on a P/E basis as well, however.

 

So Ally basically deals in the prime and near-prime borrower - any pure-play comparable comps to Ally then?

 

 

I can't find the symbol in google finance. Weird.  ::)

I have been watching this since Dan Leob took a stake a few months ago, and I have my main checking account with Ally Bank since last November.

I am not sure if I would buy now though. I want a higher Mos :)

 

I think it takes a day or two for Google to add newly IPO'd stocks to show up on its platform. Yahoo has it the same day, in my experience: http://finance.yahoo.com/q?s=ALLY

[fareastwarriors]

http://www.bloomberg.com/video/ally-is-an-roe-enhancement-story-ceo-carpenter-tfqOrAhYQveLboBCZrjR9g.html

 

CEO on BloombergTV

[lagniappe]

My apologies.  Yes, it should read CACC. 

 

Another potential comp but underwrites subprime primarily is SC (Santander Consumer USA) that went public in January. It has experience heavy price decreases as well with the recent market sell off.  It's trading rather cheaply on a P/E basis (approx 10x 2014E) due to the price decline.  Further price decline could result in a compelling buy as well.

 

 

 

 

 

 

[fareastwarriors]

Ally - Initiating Coverage at BUY with $31 Price Target;

BTIG Research - 4-10-14

BTIGLLCResearchDivision_AllyFinancialIncInitiatingCoverageatBUYwith31PriceTargetExecutionofPlantoBoostReturnsShouldSpurStock_Apr_10_2014.pdf

[PatientCheetah]

why are SC, ALLY, and CACC's margins are so different if they have similar business models? ALLY stands out especially.

[Spekulatius]

why are SC, ALLY, and CACC's margins are so different if they have similar business models? ALLY stands out especially.

 

ALLY has negligible exposure to the subprime market and that is where the money is made right noe. ALLY NIM is only ~2.5%.

 

FWIW, I like ALLY and have been building the position. It's cheap based on tangible book, but the main thing is that earnings are bound to improve, because they replace high cost unsecured debt with ~5.6% interest rates, with cheap deposits costing ~1.2% currently. They still have almost 30B$ in unsecured debt. Since they are growing their deposit base nicely, it is clear that replace this high cost debt with cheap deposits will improve ALLY's bottom line.

 

This story will become even better, if interest rates go up moderately. In a way, one could regard this as a nicely growing and low cost internet bank (with excellent customer service reputation) that just choose to put most of their assets into car loans.

On top of that, we have headwinds from the resolution of the mortgage business (currently in liquidation and breakeven, but still with ~8B$ in assets) and headwinds from cost reduction efforts (controllable expenses trending down). I think this is a nice medium term (12-18month) balance sheet restructuring story and while I don't know how long it's going to take,  i can easily see north if 3$/share in earnings.

[LowIQinvestor]

I am early in the due diligence process but this looks appealing on the surface.

 

Industry: Online Bank/ Auto Loans

 

- Currently trades at a 20% discount to book value

- $1.8B in net DTA (Deferred Tax Asset)

- Online Banking Trend (No branches)- Impressive retail bank deposit growth

- Treasury set to exit stake this year (2014)..near term pressure on stock.

- Third Point owns close to 10% of shares outstanding (see investment thesis link)

 

Third Point write-up:  http://cdn2.insidermonkey.com/blog/wp-content/uploads/2014/01/ThirdPointQ42013Letter.pdf

 

NEWS: Treasury sold 8,890,000 shares, now holds ~13.8% of ALLY; will continue sell in a second pre-defined written trading plan (ALLY) : The U.S. Department of the Treasury announced the completion of the first pre-defined written trading plan for Ally Financial common stock. Treasury sold 8,890,000 shares and recovered ~$218.7 million for taxpayers. With the conclusion of the first trading plan, Treasury now holds 66.2 million shares of common stock, or ~13.8 percent, of Ally.

 

Latest Investor presentation: http://www.ally.com/about/investor/events-presentations/

 

 

 

[CorpRaider]

I'm sniffing around too, seems perhaps a pity that there aren't any tarp warrants.

[wknecht]

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ally-financial-ally-ipo-price-decline/msg166291/#msg166291

 

I follow this passively so don't know all the details, but about their deposit growth - if you subscribe to Barron's you will notice Ally seems to consistently offer the highest CD rates.

[LowIQinvestor]

(Moving my comment over to this older thread on ALLY). ALLY is getting attractive.

 

I am early in the due diligence process but this looks appealing on the surface.

 

Industry: Online Bank/ Auto Loans

 

- Currently trades at a 20% discount to book value

- $1.8B in net DTA (Deferred Tax Asset)

- Online Banking Trend (No branches)- Impressive retail bank deposit growth

- Treasury set to exit stake this year (2014)..near term pressure on stock.

- Third Point owns close to 10% of shares outstanding (see investment thesis link)

 

Third Point write-up:  http://cdn2.insidermonkey.com/blog/wp-content/uploads/2014/01/ThirdPointQ42013Letter.pdf

 

NEWS: Treasury sold 8,890,000 shares, now holds ~13.8% of ALLY; will continue sell in a second pre-defined written trading plan (ALLY) : The U.S. Department of the Treasury announced the completion of the first pre-defined written trading plan for Ally Financial common stock. Treasury sold 8,890,000 shares and recovered ~$218.7 million for taxpayers. With the conclusion of the first trading plan, Treasury now holds 66.2 million shares of common stock, or ~13.8 percent, of Ally.

 

Latest Investor presentation: http://www.ally.com/about/investor/events-presentations/

[LowIQinvestor]

Thought this quote from a news article was thought provoking:

 

"Losing the government as an investor will boost Ally's profitability because it will do away with limits on the company's business activities, Carpenter said.

 

For example, Ally faced restrictions on pricing deposits and was forced to operate its banking subsidiary with a 15 percent leverage ratio, far above the 6 percent U.S. regulators proposed on Tuesday for the subsidiaries of the country's largest banks.

 

"We have a very clear understanding with regulators that when there's no longer government ownership, those constraints will go away," and the company can achieve much higher levels of profitability, Carpenter said."

[muscleman]

This is my thought:

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10124963-1183-610809&type=sect&TabIndex=2&companyid=12134&ppu=%252fdefault.aspx%253fsym%253dALLY

 

Deposit liability 56 bn, long term debt 67 bn.

Deposit interest paid 166 mn per quarter. Long term debt interest 549 mn per quarter.

 

In the future, assume all long term debt is redeemed and replaced with deposit liability, interest saving 380 mn per quarter.

However, the more deposit liability, the more non interest expense. Current total non-interest expense $821 per quarter.

It is hard to figure out how much expense will increase when the deposit liability doubles. Could be between 0 and 200 mn?

In that case, the actual savings from retirement of long term debt will be 180 mn per quarter. So this company may be able to earn $2 bn per year?

[bobozou]

muscleman - that's along the lines of my thinking as well... they can increase earnings significantly (double?) just by better optimizing their liabilities...

 

Hopefully the below is a sign of things to come?

 

Ally Financial Announces Cash Tender Offer

http://money.cnn.com/news/newsfeeds/articles/prnewswire/DE20333.htm

[yadayada]

how does nicholas financial compare to this stock? Looks pretty cheap as well with similar upside and quicker catalysts coming up to reprice it?

[morningstar]

muscleman - that's along the lines of my thinking as well... they can increase earnings significantly (double?) just by better optimizing their liabilities...

 

Hopefully the below is a sign of things to come?

 

Ally Financial Announces Cash Tender Offer

http://money.cnn.com/news/newsfeeds/articles/prnewswire/DE20333.htm

 

They also issued $1bn in replacement debt today, so no real impact on the balance of debt vs. deposits, though it will still positively impact earnings b/c they've decreased the term of the liabilities so they will yield less.

[bobozou]

how does nicholas financial compare to this stock? Looks pretty cheap as well with similar upside and quicker catalysts coming up to reprice it?

 

I was in NICK a long time ago... got out back when it was 'being bought out'... surprised to see how far it fell...

• At current valuations, it looks cheap on earnings and dividend basis
  
• Earnings are likely to be pretty stable, except for the possibility of credit provisions if losses increase (but even that is more 'one time')
  
• However, revenue growth is likely to be slow (bc of such intense competition in subprime)
  
• It just feels like 'subprime auto' is due for contraction (if we get rate spike or recession)... NICK is focused squarely on subprime...
  
• Longterm, a subprime event will be good for NICK (rationalizes competition), but short-term earnings will get hit (credit provisions)
  

In summary, NICK looks attractive now... but I dont see robust growth unless we experience a pullback in subprime auto, and if that happens, you could well get better entry points... I remember buying NICK in 2007 for like $8, before it fell to $2-3... Even though its cheap now at $12 (and you'd probably be fine if you bought here, long term), I'm probably not interested unless it gets cheaper, or the subprime auto industry passes thru the peak of the cycle.

 

What's the catalyst?

 

[bobozou]

They also issued $1bn in replacement debt today, so no real impact on the balance of debt vs. deposits, though it will still positively impact earnings b/c they've decreased the term of the liabilities so they will yield less.

 

Any idea on what the rates on new issuance are/will be?  The stuff they're tendering back was yielding about 8% (seems a bit obscene), and I would think current debt issuance would be much more reasonable...

 

But yea, the conversion of expensive debt to cheap deposits (or even securitizations, at current cost of funds) is going to take place over the course of several years (3-5 by my estimates).

[muscleman]

muscleman - that's along the lines of my thinking as well... they can increase earnings significantly (double?) just by better optimizing their liabilities...

 

Hopefully the below is a sign of things to come?

 

Ally Financial Announces Cash Tender Offer

http://money.cnn.com/news/newsfeeds/articles/prnewswire/DE20333.htm

 

They also issued $1bn in replacement debt today, so no real impact on the balance of debt vs. deposits, though it will still positively impact earnings b/c they've decreased the term of the liabilities so they will yield less.

 

Hmm... Why would they issue new debt instead of using deposit to retire the debt? Is it because they don't have sufficient deposit to do so?

[LowIQinvestor]

I'm buying today.

 

Think it is a $30 stock in 2 years. I highly recommend reading their 2013 annual report.

 

Wish they had capacity to do a buyback here.

[muscleman]

They also issued $1bn in replacement debt today, so no real impact on the balance of debt vs. deposits, though it will still positively impact earnings b/c they've decreased the term of the liabilities so they will yield less.

 

Any idea on what the rates on new issuance are/will be?  The stuff they're tendering back was yielding about 8% (seems a bit obscene), and I would think current debt issuance would be much more reasonable...

 

But yea, the conversion of expensive debt to cheap deposits (or even securitizations, at current cost of funds) is going to take place over the course of several years (3-5 by my estimates).

 

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10217963-2043-13605&type=sect&TabIndex=2&companyid=12134&ppu=%252fdefault.aspx%253fsym%253dALLY

 

[morningstar]

muscleman - that's along the lines of my thinking as well... they can increase earnings significantly (double?) just by better optimizing their liabilities...

 

Hopefully the below is a sign of things to come?

 

Ally Financial Announces Cash Tender Offer

http://money.cnn.com/news/newsfeeds/articles/prnewswire/DE20333.htm

 

They also issued $1bn in replacement debt today, so no real impact on the balance of debt vs. deposits, though it will still positively impact earnings b/c they've decreased the term of the liabilities so they will yield less.

 

Hmm... Why would they issue new debt instead of using deposit to retire the debt? Is it because they don't have sufficient deposit to do so?

 

A bank this size will try to balance its access to different funding markets... so they are always going to be an issuer of LT debt. A key purpose of this transaction, which will provide negligible earnings improvement, was probably to create an on-the-run 10y bond (which Ally previously lacked) - improves liquidity and comparability of the debt structure.