Is Ally IPO a buy?

Will the Ally IPO be a buy? Here are three (not necessarily convincing reasons) to be bullish on the stock.

Welcome to the new incarnation of GMAC: Ally Financial, Inc. The storied company was originally founded by General Motors in 1919 as a lending house for car buyers. Nearly a century later, GMAC had expanded into insurance, online banking, and subprime lending.

It was subprime lending, of course, that would eventually knock GMAC Bank to its knees in May of 2008. The Federal government swept in, buying ever-larger chunks of the company until – in December of 2010 – it would become the majority stakeholder. Out of the ashes would rise Ally Financial, a bank holding company that’s announced plans to go public with an IPO in the next several months. Will the Ally IPO be a buy, though? Here are three (not necessarily convincing reasons) to be bullish on the stock:

1) Dollars and cents. Ally’s got a long row to hoe, but at least it’s profitable. As it stands, the company owes the U.S. Government $12.3 billion in funds received from the TARP program. That’s even after Ally’s already repaid $4.9 billion. There are glimmers of hope, though. Early figures estimate the company could raise $5 billion (per Reuters) from an IPO. That figure could grow as Ally’s IPO date nears, too.

While Ally owes the government $12.3 billion, the Treasury holds $5.9 billion in preferred stock. That means Ally actually needs to come up with just $6.4 billion to pay off the government (before any interest Uncle Sam decides to take). Total net revenue at Ally grew 22 percent last year to $7.9 billion. That was good enough $1.1 billion in profits.

2) New car anyone? I like to think of Ally as an extension of the auto industry. The bank, after all, funds 80 percent of all GM dealers and half of GM’s customers, according to the Capitalistpig Hedge Fund‘s managing member Jonathan Hoenig. Indeed, Ally financed 10 percent of all new cars sold in the U.S. last year. As the prospects for the auto industry improve, so too do Ally’s.

3) Diversification. To be successful moving forward, Ally will have to find creative new ways to make money. Mortgage lending rules will be tighter, and fees the bank can impose on its customers will be smaller. It’s clear the company must find new ways to make profits. That might not be as difficult as it sounds. When you’ve got $172 billion in assets, there are a lot of potential directions you can go in. Given Ally’s leadership in online banking and its early foray into subprime lending, the company has shown it’s not afraid of taking risks. If it makes better choices moving forward, this IPO could unlock a new and exciting chapter in the company’s future.

Bears will be bears: The bearish case against Ally is just as powerful as the bullish case, though. Since the company’s prospects are so pervasively intertwined with the fortunes of General Motors Company (NYSE:GM) and Chrysler, headwinds for American automakers mean headwinds for Ally. And gauging by the performance of GM’s stock since its IPO (down 10 percent), it looks like it’ll be a while before investors start jumping on the bandwagon again.

Then, there’s the pesky matter of dealing with regulators. Ally’s mishandling of foreclosures last year could ultimately lead to a multi-billion dollar fine from the government.

While the publicity surrounding Ally’s IPO will make it a tempting daytrade, it doesn’t take much looking to find companies with more intriguing growth profiles. Smaller companies might not have the name recognition of Ally, but they’ve probably got better financials – and that’s what matters in the long run. Until we see more innovation at Ally, there just isn’t a whole lot to get excited about.



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