On Thursday, Morgan Stanley (NYSE:MS) made a significant adjustment to its stance on Ally Financial (NYSE: NYSE:ALLY), upgrading the stock from Equalweight to Overweight and raising the price target to $47.00 from the previous $37.00. This change reflects the firm's positive outlook on the company's potential to benefit from lower interest rates.
The financial institution is seen as a prime candidate to capitalize on rate adjustments due to its loan structure and funding costs. Specifically, Ally Financial has a high proportion of fixed-rate loans, primarily in the auto sector, which accounts for 74% of its loans. Additionally, about 90% of its funding comes from deposits, with a significant portion of these being in operational savings accounts, checking accounts, and money market accounts.
Morgan Stanley's forecast includes an expectation of interest rate cuts, which aligns with their model assumptions. The firm anticipates four rate cuts in 2024 and two additional cuts in 2025. These expected rate reductions are seen as a driver for a substantial increase in Ally Financial's quarterly net interest margin (NIM), projecting a rise from 3.20% in the fourth quarter of 2023 to between 4.00% and 4.07% in the third and fourth quarters of 2025, respectively.
The anticipated changes in interest rates and the resulting improvements in NIM are expected to lead to a significant increase in Ally Financial's earnings per share (EPS). Morgan Stanley forecasts a 39% compound annual growth rate (CAGR) in EPS from 2023 to 2025, which is the highest among the firm's Consumer Finance coverage, where the median CAGR in the group stands at 10%. This optimistic outlook positions Ally Financial favorably within the sector, according to Morgan Stanley's analysis.
InvestingPro Insights
In light of Morgan Stanley's recent upgrade of Ally Financial (NYSE: ALLY), a deeper look into the company's financial metrics through InvestingPro data and InvestingPro Tips can offer additional context to investors. According to the latest data, Ally Financial's market capitalization stands at a robust $10.86 billion, underpinned by a price-to-earnings (P/E) ratio of 12.01. The adjusted P/E ratio for the last twelve months as of Q4 2023 is even more attractive at 10.77, suggesting that the company is potentially undervalued compared to its earnings.
One InvestingPro Tip that aligns with Morgan Stanley's positive stance is the company's solid performance over the last three months, with a total return of 37.49%. This strong return could be indicative of market confidence in the company's future prospects. Additionally, Ally Financial has demonstrated a commitment to shareholder returns, maintaining dividend payments for 9 consecutive years, with a current dividend yield of 3.36%.
While analysts have revised their earnings downwards for the upcoming period, the company's profitability remains a key strength, with InvestingPro Tips noting profitability over the last twelve months and predictions that the company will be profitable this year. These factors may provide further assurance to investors considering the stock's potential.
For those seeking more insights, there are additional InvestingPro Tips available for Ally Financial, which can be accessed by using the coupon code SFY24 to get an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 to get an additional 10% off a 1-year InvestingPro+ subscription.
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