Ally Financial (ALLY) Has Meaningful Drivers for Continued Outperformance - Bernstein

Ally Financial (NYSE: ALLY) shares offer continued outperformance, Bernstein analyst Kevin St. Pierre said in a note to clients Wednesday. The analyst cited two positive drivers for this outperformance: 1) the changing time horizon of the shareholder base from short-term to longer-term, and 2) the positive effect of potential S&P 500 inclusion on the stock.

On institutional ownership, St. Pierre noted that over the last few quarters, they have seen increased buying of ALLY by
traditional investment managers and increased selling by hedge funds. "Ownership by traditional managers has risen from 21% at the end of 2Q:14 to 43% at the end of 1Q:15, and our conversations with investors imply that the 2Q:15 concentration will be another step higher," he said. "While we are by no means implying that hedge-fund ownership is a negative, we do expect the generally longer-term view of traditional investment managers should result in a more stable ownership base and lower stock price volatility."

On a possible S&P 500 inclusion, the analyst notes that the company's market cap is now above the lower end of the S&P 500 and they believe it is likely they will be included in the index in the near future. St. Pierre notes positive absolute and relative performance over the "Announcement Period" (the period measured from the market close on the day of the announcement to the market close the day before inclusion). His research shows stocks with market capitalization over $10 billion generally reaped more of a benefit during the announcement period (+3%) versus smaller-cap companies (0%). ALLY market cap is ~ $11 billion.

Further the analyst said a dividend program in 2016 should broaden the appeal. "We believe there is a solid chance that ALLY gets a mid-cycle approval for the redemption of their remaining Series G preferred shares, which would open up their 2016 CCAR capital plan submission to focus solely on establishing a solid dividend and commencing a share repurchase program. We estimate that a 20% payout ratio beginning in 3Q:16."

The firm is tweaking their model ahead of 2Q results, reducing 2015 EPS estimate from $2.66 to $2.54 and our 2016 estimate from $2.66 to $2.54. The firm maintained an Outperform rating and price target of $29.00.

For an analyst ratings summary and ratings history on Ally Financial click here. For more ratings news on Ally Financial click here.

Shares of Ally Financial closed at $22.43 yesterday.

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