May 20, 2014 / 7:23 PM / 4 years ago

Five brokerages start auto-lender Ally with top rating

(Reuters) - Eleven of the 19 brokerages, which underwrote Ally Financial Inc’s (ALLY.N) $2.38 billion initial public offering, began coverage of the auto lender’s stock on Tuesday, with five of them giving their top rating.

The average price target for the stock is $27.80, with lead underwriters JP Morgan Securities and Morgan Stanley setting the highest price target of $30.

Shares of the company were slightly down at $24.21 on Tuesday, and are trading below the listing price of $25.

The coverage follows the expiry of the 40-day “quiet period” for brokerages to issue recommendations after the listing.

“Ally should benefit from still strong vehicle sales, an expanding dealer network, a broader product offering and continued growth at its direct bank,” Barclays Capital analyst Jason Goldberg wrote in a note to clients. Goldberg has an “overweight” rating on Ally’s stock.

Analysts also said the auto-lender will deliver almost double-digit return on equity (RoE) in the next two years, if it is able to lower expenses and rationalize its capital base.

J.P. Morgan Securities analyst Richard Shane said Ally has successfully grown the deposit base in recent years to 43 percent of total funding, making the company less dependent on more expensive secured and unsecured debt.

While Ally has numerous levers to grow earnings, much of it depends on the company’s ability to redeem its higher-cost preferred stock, a process that will require Fed approval, Goldman Sachs analysts said.

    The U.S. government, which held a majority stake in the troubled auto-lender after the financial crisis of 2008, saw its stake drop to 17.1 percent from 36.8 percent after the IPO.

    Chief Executive Michael Carpenter has said reducing the government’s stake to zero, which is expected to happen by the end of 2014, would contribute toward the company reaching its profitability target, namely a double-digit core return on tangible common equity.

    Evercore Partners analyst Bradley Ball said he prefers to wait for further evidence of Ally’s successful execution as a more focused domestic provider of consumer/dealer financial services with expanding deposit funding. He has an “equal-weight” rating on the stock.

    Of the 11 brokerages, six have “neutral” rating, while the rest are “overweight” on Ally’s stock.

    Reporting by Avik Das in Bangalore; Editing by Sriraj Kalluvila

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