Banking, finance, and taxes

Jefferies Sees 2 Top Auto Financial Stocks With Most Upside

Chris Lange

Published: April 7, 2016 10:20 am

Last Updated: January 13, 2020 11:03 am

One key analyst remains generally constructive, relative to the overall market sentiment, on the auto finance space heading into the new quarter. Although the brokerage firm recognizes that competition remains intense and news flow is highly critical, despite its belief that there are several attractive investment opportunities — namely that the market is currently undervaluing Ally Financial Inc. (NYSE: ALLY) and Santander Consumer USA Holdings Inc. (NYSE: SC).

Overall, Jefferies notes in its most recent report that the macroeconomic backdrop remains somewhat supportive in terms of new and used car sales, gas prices and a generally improving economy. While these trends are likely to revert over the long term, in the short term the firm expects continued strength and better than anticipated results from companies under coverage.

In its report Jefferies detailed:

Of the auto finance names under coverage, we like Ally Financial as we believe the company’s deposit-funded business insulated it from short-term capital market disruption and provides a stable, long-term, low-cost source of funds. Shareholders are also likely to benefit as returns normalize post-restructuring. We note the company should continue to benefit from ongoing optimization of its capital structure and we highlight that the diversification of its originations platform and recent capitalization is outpacing our forecast. We believe capital market disruption may impact smaller players with less diversified access to funding. Importantly, we observe this appears to be potentially insulated to the first quarter as market volatility appears to be abating.

In general, industry data points that Jefferies has collected suggest that growth and margin trends may be past their peak cyclical periods (particularly for the OEMs). However, the firm believes that overall industry trends are reasonable and that equity values for auto lenders more than adequately discount industry trends, risks and opportunities.

As a result Jefferies has a Buy rating for Ally Financial with a $28 price target. Also the firm has a Buy rating for Santander with a $15 price target.

Shares of Ally Financial were trading at $17.46 on Thursday, with a consensus analyst price target of $25.28 and a 52-week trading range of $14.55 to $23.83.

Santander shares were trading at $10.35, with a consensus price target of $15.13 and a 52-week range of $8.54 to $26.83.