This year’s consumer-driven economic rebound provided the perfect environment for Ally Financial (ALLY), suggests Richard Moroney, editor of Dow Theory Forecasts.

Ally’s automotive-finance unit (70% of revenue, 75% of operating income) finances new and used cars, typically purchasing the loans from dealers rather than marketing directly to consumers.

Ally also finances cars for businesses, particularly auto dealers’ inventory. The insurance segment (21%, 17%) provides both traditional property & casualty coverage and specialty policies sold through dealer networks.

Ally also operates corporate-finance (5%, 5%) and mortgage (3%, 3%) operations, with some products sold through Ally Bank. The bank has more than $170 billion in assets, serving 2.33 million deposit customers and more than 400,000 investment customers.

We appreciate the diversity of Ally’s smaller units, though auto financing and insurance remain in the driver’s seat. Ally, engaged with 95% of U.S. auto dealers, says it’s the No. 1 U.S. prime auto lender, processing more than 12 million consumer applications last year.

Sales from September through March rose 3% from the same period a year earlier, and March saw the highest sales since August 2015. That post-pandemic auto-purchasing surge has powered impressive growth.

Over the last 12 months, Ally grew sales 36% and per share profits 123%. Analysts expect robust auto sales for much of the rest of this year, though such torrid growth can’t continue forever.

The consensus projects sales growth of 14% and profit growth of 113% for Ally this year, slowing to 4% sales expansion and a 3% decline in earnings next year.

However, given Ally’s recent trends in profit-estimate revisions and its penchant for exceeding expectations, we see plenty of upside to the consensus.

Given uncertainties about car demand and interest rates, Ally carries more risk than our typical Buy-rated stock. However, the shares also provide an element of diversification, as we haven't recommended many consumer-finance stocks in recent years.

At nine times trailing earnings, 10% below the industry median and 6% below its own three-year norm, Ally’s valuation already bakes in plenty of risk.

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