- If you are wondering whether Ally Financial at around US$37.59 is a bargain or a value trap, the starting point is to understand what the current price implies about the business.
- The stock has recently returned 2.0% over the last 7 days, after a 7.9% decline over 30 days, with a 17.9% decline year to date but a 9.5% return over the last year and a 70.0% return over 3 years.
- These moves have played out against a backdrop of ongoing attention on consumer credit quality, interest rate trends, and funding costs for lenders. For Ally Financial, recent headlines have focused on how its auto lending, deposit base, and digital banking model fit into that broader conversation about risk and growth potential.
- Right now, Ally Financial scores 5 out of 6 on a valuation check framework. This sets up a closer look at how different valuation methods stack up and points to an even more useful way to think about value at the end of this article.
Approach 1: Ally Financial Excess Returns Analysis
The Excess Returns model looks at how effectively Ally Financial turns its equity base into earnings after covering the expected return required by shareholders. Instead of focusing on cash flows, it compares what the business earns on its equity with the cost of that equity.
For Ally Financial, book value is $42.70 per share, rising to an estimated stable book value of $51.01 per share, based on weighted future book value estimates from 9 analysts. Stable EPS is $6.10 per share, sourced from weighted future return on equity estimates from the same 9 analysts. The cost of equity is $6.02 per share, which implies an excess return of $0.08 per share. That lines up with an average return on equity of 11.96% in this framework.
Feeding these inputs into the Excess Returns model gives an estimated intrinsic value of about $51.92 per share. Compared with the recent share price around $37.59, the model suggests Ally Financial is 27.6% undervalued on this basis.
Result: UNDERVALUED
Our Excess Returns analysis suggests Ally Financial is undervalued by 27.6%. Track this in your watchlist or portfolio, or discover 49 more high quality undervalued stocks.
Approach 2: Ally Financial Price vs Earnings
For a profitable lender like Ally Financial, the P/E ratio is a useful way to relate what you pay for each share to the earnings that the business is currently generating. In general, higher growth expectations and lower perceived risk tend to justify a higher P/E, while slower growth or higher risk usually point to a lower, more cautious multiple.
Ally Financial currently trades on a P/E of 15.66x. That is above the Consumer Finance industry average P/E of 7.48x, yet below the peer group average of 39.20x. To refine this comparison, Simply Wall St calculates a proprietary “Fair Ratio” for the P/E, which is 19.55x for Ally. This Fair Ratio reflects factors such as earnings growth expectations, profit margins, industry, market cap and company specific risks.
Because the Fair Ratio is tailored to Ally’s profile, it can be more informative than a simple comparison with industry or peer averages, which may include businesses with very different risk and growth profiles. Setting the current P/E of 15.66x against the Fair Ratio of 19.55x suggests the shares trade at a discount on this metric.
Result: UNDERVALUED
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Upgrade Your Decision Making: Choose your Ally Financial Narrative
Earlier it was mentioned that there is an even better way to think about valuation, so Narratives are useful because they let you link a clear story about Ally Financial to specific forecasts and a Fair Value, then compare that to the current price to help decide whether to act or wait.
On Simply Wall St's Community page, Narratives are simple tools that allow you to set assumptions for future revenue, earnings and margins, attach your reasoning, and have the platform translate that into a Fair Value that updates automatically when new information such as earnings or news is added.
For Ally Financial, one investor might build a more optimistic Narrative around a Fair Value near US$56.49, based on higher assumed revenue growth and margins. Another investor might choose a more cautious Narrative closer to US$37.00. By comparing each Fair Value to the current share price you can quickly see which story, and which implied upside or downside, fits your own view and risk comfort.
Do you think there's more to the story for Ally Financial? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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