hello and welcome back to global value in today's
video we'll be performing a fundamental stock analysis of ally financial inc ticker symbol
ally a-l-l-y at the time of recording this video ally is trading for just over 42 dollars per
share year-to-date the stock is down about 11 going back the over the past year ally
is down about 24 over the past five years ally has done very well returning about 18
compounded annually and since they were public allies returned about six percent compounded
annually we can see that their stock price was hit very hard by the march of 2020 crash and
then went on a significant tear for over a year since about june of last year their stock
price has trended down slightly so we can see that ally is trading closer to its 52-week
low than it is to its 52-week high allies about a 14 billion dollar market cap give or take
roughly 13.7 at the time of recording this video so what does ally actually do ally financial inc
is a diversified financial services firm that services automotive dealers and their retail
customers the company operates as a financial holding company and a bank holding company
its banking subsidiary ally bank caters to the direct market banking through internet mobile and
mail the company reports four business segments including automotive financing operations
insurance operations mortgage finance operations and corporate finance operations the company
was formerly known as gmac inc and was the lending arm of general motors and changed its
name to ally financial in may of 2010 as part of a restructuring post the great recession ally
financial inc was founded in 1919 and is based in detroit michigan so we'll be performing a modified
eight pillar analysis of ally the eight pillar analysis is popularized by everything money but
it doesn't quite fit for financials and banking stocks it's modified slightly to better reflect
what some of the averages are for the industry and just some factors that we're going to want to
look at full disclaimer that i'm not an expert on financial stocks and that just by the nature
of things financial stocks are going to be more difficult to analyze uh through certain aspects
i want to be transparent that this video is about learning in public and improving as investors
by taking a look at these types of financial companies together so as we go through our
analysis together if you have any feedback about things to look at or ways to improve while
we're looking at financial and banking companies please let me know in the comments down below so
with that said let's get right into our analysis starting off with pillar number one we want
allies average five-year pe to be below 12.5 so currently ally is trading for about a
five times earnings multiple and over the past five years they've traded at just around 10 times
earnings so pillar number one is gonna be a check pillar number two we want allies average five-year
return on equity to be above nine percent while their return on equity has fluctuated a bit ally
does a pretty good job here they've done very well over the past year and averaged out their return
on equity is exactly 11.11 so pillar number two is gonna be our second check pillar number three
we're looking for five-year revenue growth they've grown revenues from 5.9 billion dollars in 2017 to
about 8.7 billion in 2021.
So far so good we have three checks in a row next up we're looking for
five-year net income growth so in 2017 they had about 930 billion dollars of net income and they
tripled this to about 3 billion dollars in 2021 so that's another check on pillar number four because
banking stocks are using their deposit base we're actually going to value the company based
on its net income averaged out throughout this time period they earn about 1.6 billion dollars
a year so we'll use that number in place of their free cash flow for pillar seven and eight coming
up later on pillar number five we're looking for decreasing shares outstanding when you purchase
a stock what you're really buying is an ownership percentage in a business so you don't want a
business that dilutes shareholders and ultimately lowers that ownership percentage without your
say we can see that over this time period ally has bought back a good amount of their shares
they've nearly repurchased 20 of shares since 2017 and they're down from 455 million to
about 365 million as of the end of 2021 so ally has been repurchasing shares throughout
this time period and for existing shareholders they've been increasing their ownership percentage
in the business which ultimately means that you're entitled to a greater percentage of allies
future profits so that's a great sign here we're doing well so far we're five for five
through the first five pillars pillar number six we're looking for five year free cash flow
growth so this one's gonna be our first x they had positive free cash flow in 2017 and they had
negative one billion dollars of free cash flow in 2021 so this is a result of them spending
more on capital expenditures for the business so they had positive earnings so what this means
is that the business hasn't lost a billion dollars rather that billion dollars has been invested into
the business as capex going forward while having negative free cash flow for most other businesses
would be a pretty bad sign negative free cash flow is potentially a sign of a well-performing
bank meaning that they're boosting their lending averaged out over these five years ally consumes
about a quarter billion dollars of free cash flow each year so again pillar number six is our first
x for pillar number seven we want allies net debt which is their long and short term liabilities
minus their cash and short-term cash equivalents to be below their average five-year earnings
multiplied by five so ally as of the end of last year had about 12 billion dollars of net debt
multiplying their average five-year earnings of 1.6 billion dollars times five brings us to
about eight billion dollars so pillar number seven is also gonna be an x finally the big pillar of
them all pillar number eight we want allies market cap to be below their five-year average net income
multiplied by 10.
So 10 is half of our usual 20 that we use for pillar number eight however 10 is
just a starting point it's more apt because it's in line with the averages for financial companies
historically so ally has nearly a 14 billion dollar market cap multiplying their average
five-year earnings of 1.6 billion dollars times 10 brings us to 16 billion dollars so that gives us
about two billion dollars for margin of safety for pillar number eight and that's going to
be a check on pillar number eight based off of their earnings profile it looks like ally
is slightly undervalued at this current price this type of analysis is just a this doesn't
necessarily mean that just because it checked the box on pillar number eight that you want to go out
and buy ally right away this type of analysis is just a starting point to get a holistic overview
of the business based on its financials it's not any sort of investment or financial recommendation
so before you decide one way or the other on ally i recommend digging into the company's filings
and learning more about the business in depth you really don't want to invest in a business
unless you truly know it inside and out and can understand the essence of the business which is
just something that this type of analysis can't provide this is just a starting point the last
thing i want to look at is allies dividend profile ally has been steadily increasing their dividends
per share over the past five years they've also managed to keep a relatively low payout ratio
for their dividend so based on these past years it looks like they have a pretty healthy
and secure dividend going on into the future whether or not these annual dividend increases are
going to continue i can't say based off of this but it does look like their dividend profile
is in good shape so in summary ally checks the box on six out of eight pillars the business
earns good returns on equity it's trading for reasonable multiples and it's experienced growth
over the past five years they're also buying back a good amount of shares and increasing the amount
of capital that they're returning to shareholders so again this sort of modified analysis is not
going to be perfect for financial companies if anything stood out to you about how we can improve
this type of financial analysis going forward i would really appreciate if you left me a message
in the comments ultimately i want to be performing the best and most clear fundamental business
analysis that i can covering the full gambit of businesses from every industry any way that i can
improve on that is greatly appreciated well guys that's it for today's stock analysis of ally
financial inc ticker symbol ally a-l-l-y if you enjoyed the video please be sure to like the
video subscribe to the channel for more stock analysis videos and comment down below what
business you want me to take a look at next ally was a subscriber request so thanks for
learning about ally with me and have a great day
