Rev Your Engines: Why BofA Reinstates Ally, Santander At Buy

While the shares of both Ally Financial Inc ALLY and Santander Consumer USA Holdings Inc SC are “at the high end of their respective trading ranges,” auto lenders are expected to face a positive economic and operating environment, which should drive earnings estimates higher and support multiple expansion, according to BofA Securities.

The Auto Finance Analyst: Brandon Berman reinstated coverage of both Ally Financial and Santander Consumer USA with Buy ratings and price targets of $64 and $36, respectively.

The Auto Finance Thesis: The unemployment rate is likely to ease to 5.2% by year=end 2021, “implying default rates should only modestly rise from current levels, even when accounting for deferral activity,” Berman said in the reinstation note.

“Near term supply constraints for new vehicles remain supportive of used car demand and prices, which is a key factor for keeping loss upon default manageable,” he added.

With the economic expansion, projected auto sales of less than 15 million in 2021 are expected to “turn into 2% origination growth for both ALLY and SC,” the analyst said. He further expects funding costs to remain low in the medium term.

Referring to Ally Financial, Berman wrote, “We believe the company’s established relationships with dealers provide ALLY a key competitive advantage, while its access to retail deposits further enhances its funding cost advantage vs. smaller industry participants — particularly in a rising rate backdrop.”

For Santander Consumer USA, the analyst said in the note, “We believe the current discounted valuation vs. other pure-play subprime auto finance companies — likely due to overblown credit quality concerns — offers investors an attractive entry point given SC’s scale and funding advantages.”

ALLY Price Action: As of Monday morning, shares were up 1.84% to $48.03.

SC Price Action: As of Monday morning, shares were up 3.58% to $30.05.

(Photo: Christian Guirguis via Unsplash)