Why Ally Financial shares fell this morning

What happened

Shares of Allied Financial (ALLY 1.96%) were down 5.2% at 10:28 a.m. ET Wednesday after reporting worse-than-expected third-quarter results.

The stock has fallen 43% since the start of the year with the general market slowdown. The stock trades at a low price-to-earnings ratio, which attracted a small investment from Warren Buffett. Berkshire Hathaway. Are Ally’s latest results good enough to warrant buying the stock at these lows?

So what

Adjusted revenue was $2.09 billion, below expectations of $2.16 billion. More concerning was the big shortfall in net income, where adjusted earnings per share of $1.12 was well below the average estimate of $1.73.

Part of the shortfall was due to an impairment of non-tradable equity investments related to Ally’s mortgage business, which reduced earnings by $0.33. Additionally, the company has made higher provisions for loan losses due to recent loan growth in the auto finance space. The higher provisions are designed to protect the business if the economy plunges into a recession, making it difficult for people to repay their loans.

The good news is that Ally continues to achieve a strong return on tangible equity of 17% in the quarter, although it fell 24% in the prior year quarter.

Now what

The high return on tangible equity makes the low stock valuation attractive. The stock is currently trading at a price-earnings ratio of 3.8 based on the consensus estimate for this year’s earnings. It also trades at a discount price of 0.78 times tangible equity or book value.

On the other hand, adjusted tangible book value per share fell 12% from the prior quarter, making Ally’s return on equity less meaningful. With the company seeing its equity plummeting as the economy weakens, the stock may not be as undervalued as it seems.

Ally is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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