Veteran investor Warren Buffett is widely known for his long-term value investing strategy. Financial services company Ally Financial Inc. (ALLY) is one of the newest additions to Buffett’s Berkshire Hathaway (BRK.B) portfolio.

ALLY was added to Buffett’s portfolio in the first quarter of 2022. As of the fiscal 2022 third quarter, Berkshire Hathaway had approximately 30 million shares of ALLY valued at more than $830 million. ALLY constitutes nearly 0.3% of Berkshire’s investment portfolio.

Full-service online bank ALLY endured the challenging fiscal year 2022 and is expected to face more challenges in the near term. ALLY reported net revenue of $2.02 billion for the third quarter, up 1.6% year-over-year. However, the company’s bottom line declined significantly. Its net income decreased 58% from the prior-year period to $299 million, and its EPS came in at $0.88, down 54% year-over-year. There was a jump in provisions for credit losses.

While loan volumes were up and originations were high during the third quarter, ALLY was primarily hurt by higher funding costs, which narrowed its net interest margin (NIM). The company’s NIM was 3.8%, down from 4.04% in the second quarter of fiscal 2022. In addition, used car prices are declining, which could significantly reduce loan volumes in the near term.

Also, the Fed indicated raising interest rates through this year, which could potentially affect the pace of consumer lending.

Analysts are growing bearish about ALLY. Last month, Morgan Stanley analyst Betsy Graseck downgraded the stock on consumer credit concerns to Underweight from Equal-Weight with a price target of $19.00, down from $28.00.

ALLY’s stock has declined 27% in price over the past six months and 48.6% over the past year to close the last trading session at $24.45.

Here’s what could influence ALLY’s performance in the upcoming months:

Deteriorating Financials

For fiscal 2022 third quarter, ended September 30, ALLY’s total financing revenue and other interest income increased 26.8% year-over-year to $2.76 billion, while its total net revenue was $2.02 billion, up 1.6% year-over-year. However, the company’s net income from continuing operations declined 57.9% from the year-ago value to $300 million.

In addition, the company’s net income declined 58% from the prior-year period to $299 million, and its EPS came in at $0.88, down 54% year-over-year. As of September 30, 2022, ALLY’s total liabilities stood at $176.21 billion, compared to $165.06 billion as of December 31, 2021.

Unfavorable Analyst Estimates

Analysts expect ALLY’s EPS for the fourth quarter (ended December 31, 2022) to decline 50.6% year-over-year to $1. The company’s EPS for fiscal 2023 and 2024 is expected to decrease 29.8% and 27.5% year-over-year to $6.05 and $4.38, respectively.

Mixed Profitability

ALLY’s trailing-12-month ROCE of 15.82% is 37% higher than the 11.55% industry average. Likewise, its trailing-12-month CAPEX/Sales of 45.60% is 2,626.1% higher than the industry average of 1.67%.

However, the stock’s trailing-12-month net income margin of 25.54% compares to the 27.80% industry average. Furthermore, its 1.11% trailing-12-month ROTA is 4.4% lower than the industry average of 1.16%.

POWR Ratings Reflect Bleak Prospects

ALLY has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ALLY has a D grade for Growth and Sentiment, in sync with its unfavorable analyst estimates. The stock also has a D grade for Stability. The stock’s relatively high beta of 2.45 justifies the Stability grade.

ALLY is ranked #40 out of 48 stocks in the D-rated Consumer Financial Services industry. Click here to access ALLY’s Profitability, Valuation, and Momentum ratings.

Bottom Line

ALLY missed its revenue and earnings expectations in the third quarter. The stock is trading below its 50-day and 200-day moving averages of $25.88 and $33.83, respectively, indicating a downtrend. Moreover, given an uncertain macroeconomic environment, the company is expected to face various headwinds.

Despite being a Warren Buffett holding, ALLY’s stock has plunged more than 27% over the past six months. Given its disappointing financials, slowing momentum, and bleak growth prospects, it could be wise to avoid this financial stock now.

How Does Ally Financial Inc. (ALLY) Stack up Against Its Peers?

ALLY has an overall POWR Rating of D, equating to a Sell rating. Therefore, one might want to consider investing in other Consumer Financial Services stocks with a B (Buy) rating, such as Ezcorp Inc, CI A (EZPW), Atlanticus Holdings Corporation (ATLC), and MainStreet Bancshares, Inc. (MNSB).

ALLY shares fell $0.20 (-0.82%) in premarket trading Tuesday. Year-to-date, ALLY has declined 0.00%, versus a 0.00% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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