Ally Financial’s originations are on pace to increase 20% in the coming years as the non-General Motors and non-Chrysler dealers in the lender’s network boost their application volume, wrote Jefferies Research Services analyst John Hecht in a report yesterday. In a best-case scenario, that growth could reach as high as 31%, he added.
Ally has added about 4,000 to its network in recent years. At last count, Ally’s dealer base was up to 18,200, which represents 90% of the franchise dealership market, according to the report.
Hecht’s estimates hinge on the premise — noted by the bank’s management team — that Ally receives three to five times the application volume from longstanding dealer partners versus newer ones, deemed “growth channel” dealers. “Using our 2019 originations forecast as a base, we estimate that Ally can grow originations by 14% relative to our original estimate if its growth channel application volume doubles, 20% if it triples, 25% if it quadruples and 31% if it grows by five times, Hecht wrote in the report.
While the increase is unlikely to hit those levels in the near term, “we believe substantial incremental opportunity exists over time for Ally to grow application volumes, and ultimately originations, even if the end market is relatively stagnant,” Hecht noted.
Further, Ally’s floorplan financing, insurance and training services are “more comprehensive” than those its peers, serving as an advantage against other lenders, Hecht pointed out.
Jefferies has a “buy” rating on Ally’s stock [ticker: ALLY] and a $38 price target, which is about 9.5 times fiscal year 2020 earnings per share. The stock was trading up 1.78% at $31.75 per share, as of 11:30 a.m. EST.
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