Ally Financial IPO could use some allies, opens down 2 percent

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WASHINGTON, April 10, 2014 – Priced last night, the new IPO stock of Detroit-based Ally Financial, formerly known as General Motors Acceptance Corporation (GMAC), began a disappointing morning of trading Thursday on the New York Stock Exchange under the symbol ALLY.

Priced last night at $25 per share—the bottom of its expected $25-28 range—the stock began trading this morning off as much as 3 percent. The transaction raised roughly $2.38 billion for the seller of the stock, the U.S. Treasury whose offering of some 95 million new shares is expected to reduce the government’s ownership of ALLY stock from 37 percent to about 17.

“With this offering, taxpayers have now recovered more than they invested in Ally,” bragged Treasury Under Secretary Mary Miller, in a prepared statement, which neglected to note that the Fed’s lost considerably more than that amount in the TARP exit of Ally’s former corporate parent, General Motors (GM).

Now mostly on its own, long troubled but gradually healing giant lender Ally has been on TARP life support since the depths of the 2008-2009 stock market debacle, dragged down primarily by its huge portfolio of failing substandard mortgage loans. As a result of Federal government intervention, courtesy of the American taxpayer, the Treasury Department essentially took over GMAC in the depths of the formal Great Recession when the lender, like numerous banks and bank-like institutions, was on the verge of going under.

Renaming itself first as Ally Bank (2008) and later as Ally Financial (2010), GMAC reorganized quickly as a bank and bank holding company in order to become eligible for assistance from the Federal TARP rescue plan.

Since then, under government supervision, Ally essentially walled off its bad portfolio of failing subprime real estate loans that were proving the greatest threat to its continued corporate viability. At the same time it altered its structure and approach to become a primarily online consumer banking business while still engaging in its traditional and substantial auto lending business while re-entering the real estate lending business as well.

From the moment of its IPO this morning, Ally became the 19th largest banking institution in the U.S., although it also emerges as one if that industry’s weaker financial players at least at the moment. The company needs to aggressively grow its already successful consumer banking business while remaining competitive in its still-key auto lending business, which has been hurt somewhat this year due to its being replaced as the preferred lender to both Chrysler and GM itself.

An additional potential problem for that part of its business is the possibility that auto sales will level off or drop this year if the economy doesn’t start picking up soon.

In any event, the “new” company’s potential value to investors is less a short term growth story than it is an intermediate term recovery story as the company, hopefully, begins to beef up its still weak balance sheet while increasing its margins.

The weak pricing and trading action in the issue this morning indicates that the new shares were not hugely in demand in a market that’s become a bit more skeptical of IPOs recently, given the bad behavior of stocks in general over the last two weeks or so. Furthermore, one of Ally’s biggest competitors, an American division of giant Spanish banking conglomerate Santander, also had a weak IPO earlier this year in spite of its far more robust financials.

While the investing public clearly remains skeptical of Ally in the near term, at least one analyst is already calling for the company’s shares to rise to $31 per share by sometime next year.

In a statement this morning on Street Insider news, BTIG analyst Mark Palmer notes that ALLY’s strategic plan, which is focused on increasing its return on average tangible common equity (ROTCE) to double digits by YE15 (from 3% at YE13) by improving its cost of funding through liability management, reducing its operating costs and capitalizing on enhanced regulatory flexibility, is well within management’s ability to execute. Achieving this goal should allow ALLY to achieve a fuller valuation than the 1.14x FY13 book value implied by the low end of the IPO range.”

After what may have been the biggest dead-cat bounce in recent memory, all major U.S. stock markets are wobbly-to-negative this morning, making yesterday’s party look suspiciously like an aberration. Likely the best thing to have done yesterday was to have sold shares on the rally. But then again, even grizzled traders and back-office veterans are increasingly bewildered by a 2014 market that zigs and zags seemingly at random and for no particular reason.

As of 10:45 a.m. EDT this morning, the Dow—“window dressing for the tourists” according to ETF guru Dave Fry—is off about 17 points. The more representative S&P 500 is off about 6, while the tech heavy NASDAQ, which recovered nicely yesterday, is getting sledge-hammered once again today, off nearly a whopping 40 points.

Today’s trading tips:

Just for fun, we managed to snag a token 100 shares of ALLY on the offer and paid the price for getting on that thrill ride which broke down shortly after we were strapped into our seats.

We are actually taking a longer-term view on this as ALLY, for all its near-term recovery issues, arrives on the market as an almost squeaky-clean banking institution, largely free of the burdens, loans, and associated fines that got it into trouble to begin with.

That makes it different from giants like Citi (C), J.P. Morgan Chase (JPL) and Bank of America (BAC) which still seem to keep queuing up to pay a new $1 billion fine nearly every month these days for some alleged infraction or another—given that the Feds pretty much forced them to buy the troubled institutions they’re now being blamed for owning in the first place.

Like the lonely analyst above, we think ALLY is a slow, steady recovery story that will be spared most of these large, ongoing fines and penalties as it builds its still-weak capital cushion back to more or less Basel-compliant levels.

Meanwhile, we picked up our first small position in unleveraged short S&P ETF SH yesterday and may add more today if the market would stop going down for a moment at least.

Otherwise, it’s a little risky to go short or long anything this morning. So your best bet, unless you want to hedge your current portfolio with some SH (no pun intended), is to go do something enjoyable today and avoid watching the tape.

Have a good one.

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