Investors eyeing auto finance stocks are turning to OneMain Finacial (OMF), which had the highest share performance during the third quarter, outpacing Ally Financial and Santander Consumer USA (SCUSA), according to a research report released this week by JPMorgan.
OneMain Financial’s third quarter share performance reached 15.2%, compared with Ally Financial at 7.6%, and Santander Consumer USA at 7.4%, according to the report. JPMorgan defines share performance as the actual rate of return of an investment as a percentage, based on the investment’s cost and its current market value.
“OneMain Financial offers the most compelling balance,” Richard Shane, analyst, said in the report. Additionally, OMF’s position as a nondepository lender is a positive, as OMF will have “more capital flexibility under Current Expected Credit Losses (CECL) than banks,” he noted.
OMF’s stock performed well as a result of strong second quarter earnings that outpaced consensus estimates, according to the report. OMF originated $3.9 billion of auto loans in the second quarter, of which 55% was secured, up from $3.2 billion and 47% secured during the prior-year period, according to the lender’s earnings report.
Ally Financial’s stock, however, experienced a downgrade this week by Shane from to “neutral” from “overweight” — which is the equivalent of “hold” from “buy” — cutting its stock price target $2 to $33 per share. The downgrade reflects Shane’s apprehension about Ally’s performance through an economic downturn.
“Because of the pro-cyclical nature of the auto lending businesses, economic downturns could negatively impact the company in several ways,” Shane said. “Delinquencies, defaults, repossessions and losses all typically increase during recessionary periods.”
In addition, competition is increasing in auto lending and among depository institutions, which could pressure Ally’s pricing, Shane noted. Plus, Ally could be negatively impacted by declines in the value of used cars as it is a leading lender in the used-car market.
While stock performance should remain “solid” through year end, JPMorgan’s analysts have a “more cautious” outlook headed into 2020, according to the report. Specifically, the prospects of a slowing economy, indications of pockets of labor weakness and heightened political uncertainty may weigh on the sector.
At press time, OneMain Financial’s stock was trading at $35.16 per share on the New York Stock Exchange, up 1.77%. The company has a market capitalization of $4.79 billion. Ally Financial’s stock was trading at $30.85 per share, up 1.31%. The company has a market capitalization of $12.04 billion. Meanwhile, Santander Consumer USA’s stock was trading at $25.01 per share, up 1.26%. The lender has a market capitalization of $8.65 billion.
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