Will Ally Financial (ALLY) Rise Further Post Q3 Earnings?

Ally Financial Inc. (NYSE:ALLY) is slated to announce third-quarter 2016 results on Oct 26, before the market opens.

Last quarter, growth in revenues had supported Ally Financial to surpass the Zacks Consensus Estimate. This was partially offset by a rise in provision for loan losses and higher operating expenses.

The earnings beat translated into improved performance of the stock during the three-month period ended Sep 30, 2016, with shares increasing more than 16%. Also, analysts seem to be happy with Ally Financial’s business activities in the just concluded quarter, as evident from a 2% rise in earnings estimate over the last 30 days. Notably, the Zacks Consensus Estimate of 59 cents remained stable over the last seven days.

Further, Ally Financial boasts a decent earnings surprise history, as evident from the chart below:

Will Ally Financial be able to beat estimates this earnings season or will higher provisions hurt the results again? Let’s check how things have shaped up for this announcement.

Earnings Whispers

Our proven model indicates that chances of Ally Financial to beat the Zacks Consensus Estimate in the third quarter are high. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. This is the case here, as elaborated below.

Zacks ESP: The Earnings ESP for Ally Financial is 1.70%. This is because the Most Accurate estimate of 60 cents is above the Zacks Consensus Estimate stand at 59 cents.

Zacks Rank: Ally Financial has a Zacks Rank #3 (Hold). This along with positive earnings ESP increases the chances of earnings beat.

Factors to Impact Q3 Results

Revenue Growth to Continue: Primarily dealing in auto loans, Ally Financial’s performance is mainly dependent on the overall health of the auto industry. While demand for vehicles (both new and used) has been tapering over the last couple of months, the effect of the same will likely take some time to effect auto financing sector.

Therefore, Ally Financial should witness an improvement in Automotive Finance and Insurance divisions’ revenues in the quarter, driven by a consistent rise in auto sales. Further, management expects net interest margin to improve during the quarter on a year-over-year basis.

In addition, Ally Financial’s strategies to diversify revenue sources with the efforts to improve digital offerings and introduce new products should support top-line growth during the quarter. Moreover, the acquisition of TradeKing will assist revenue growth.

Rise in Expenses: Ally Financial has been making efforts to grow inorganically, introduce new products and again foray into mortgage business. Given these strategies, the company should record an increase in operating expenses (similar to the last reported quarter).

Higher Provisions to Continue: Ally Financial has been witnessing a persistent rise in provision for loan losses. Provisions are expected to increase primarily due to continued rise in loan balances. Further, total charge-offs on the retail auto loan portfolio are projected to witness a moderate increase due to mix optimization.

Stocks to Consider

Here are a few finance stocks that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

State Street Corporation (NYSE:STT) is scheduled to report results on Oct 26. The company has an Earnings ESP of +0.80% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Raymond James Financial, Inc. (NYSE:RJF) has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

Lazard Ltd. (NYSE:LAZ) , another Zacks Rank #2 stock, has an Earnings ESP of +3.90%. It is scheduled to report results on Oct 27.

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