Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Can you trust a used-car salesman? Or at least a used-car loan salesman? 

That's the predicament Jeffrey Brown, CEO of Ally Financial, finds himself in as he tries to convince investors that his company's stock does not deserve its depressed valuation. The discount is remarkable, even amid an underperforming financial sector this year. Take a look at how Ally's price-to-book and PEG ratios -- which divides its P/E by its earnings growth forecast -- stack up: 

Bargain Hunter's Ally?
Ally Financial trades at a discount to both its book value and its expected earnings growth
Source: Bloomberg

"At today's equity price, our company is severely undervalued given the earnings profile of our leading franchises and gives no value to the leading digital position we've established for the future," he told analysts on a conference call after the lender formerly known as GMAC reported better-than-estimated earnings. "Over the last 12 months, Ally has posted pretax income of about $1.7 billion, and we're trading at a $4 billion discount to book value. We don't see any rationale to explain such a deep discount."

Cash for Clunker
Ally's share price has had a rough ride since the former GMAC went public in 2014
Source: Bloomberg

Well, let's take a stab at it and see if we can spot that rationale. First off, right or wrong, people are nervous that the credit cycle in general is turning or will turn soon and that auto loans in particular are risky. Ally's own numbers don't indicate much of a turn, but neither do they do a lot to calm the nerves. Provisions for bad loans increased, and its estimate of annualized loss rates for car loans it originated ticked up to 1.24 percent in the latest quarter from 1.12 percent in the period a year earlier. However, the "risk-adjusted retail auto yield," which subtracts the estimated loss rate from the yield on the loans it originated, rose to 4.6 percent from 4.16 percent amid growth in nonprime loans. 

Another cloud hanging over the stock, perhaps unfairly, may be that one of its biggest competitors in the auto-lending space is Santander Consumer USA Holdings Inc., a company whose parent just flunked U.S. regulators' stress tests and one that just can't quite seem to get those pesky "certain accounting matters" squared away to file its financial reports on time. Unfair, because Ally passed its stress test, is about to pay its first dividend and plans to buy back shares. 

Also obscuring the picture are used-car prices, the direction of which signal not only the riskiness of its loans but also how much Ally stands to make by selling cars when they come off leases. They have been all over the place:

Road Trip
Used-car prices have fluctuated without a clear trend in recent years
Source: Bloomberg, Manheim Auctions
Note: Index intends to capture used-vehicle pricing trends independent of underlying shifts in characteristics of vehicles sold. It was started in 1995 with a value of 100.

And though return on tangible common equity did break into the elusive double digits in the latest quarter, the growth rate of Ally's earnings hasn't been smooth: 

Rocky Road
Earnings growth has oscillated between dazzling and disappointing for Ally Financial
Source: Bloomberg

Is this enough to make that discount seem rational? The analysts who cover the stock don't seem to think so. While Ally ranks toward the bottom in valuation metrics compared with other financial firms, it ranks near the top in Wall Street's adoration with 16 buy ratings, three holds and zero sells. The average price target implies a 38 percent gain, according to data compiled by Bloomberg. 

Part of the allure is that Ally is gathering deposits briskly -- up 18 percent from last year to $72 billion -- meaning the junk-rated bank could become less and less reliant on more-expensive market-based funding for its loans. With three-quarters of its revenue coming from auto finance, it's also trying to diversify into other businesses. It's branching out into credit cards, and recently completed the acquisition of the online brokerage TradeKing. 

 This all may not be enough for Brown to get you to drive away in this baby, but it sure does seem as if it's worth kicking the tires. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at

To contact the editor responsible for this story:
Daniel Niemi at