Berkshire Hathaway Inc (BRK.B)

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Buffett's Berkshire Hathaway sees opportunity in Ally Financial amid rate hikes
By: Investing | November 22, 2023

Warren Buffett's investment conglomerate, Berkshire Hathaway (NYSE:BRKa), maintains a significant stake in Ally Financial (NYSE: NYSE:ALLY), valued at approximately $798 million. Despite the auto financing sector being hit by rising interest rates, which has led to a decline in Ally's stock value, Berkshire Hathaway owns nearly 10% of the company. This move signals Buffett's recognition of an undervalued opportunity in the market.

Ally Financial operates a branchless digital banking model, which has been instrumental in offering competitive interest rates to customers while keeping operational costs low. This strategy has contributed to the company amassing over $161 billion in assets and achieving an impressive customer retention rate of 96%. The bank's innovative approach was rewarded with a top industry accolade this year.

Buffett is drawn to Ally due to its valuation at just 86% of tangible book value, along with its strong dividend history. Since mid-2016, Ally has increased its dividend payouts by 275%, showcasing robust financial health even as challenges persist. These challenges include tighter net interest margins and a rise in loan delinquencies, which are indicative of broader economic strain.

Nonetheless, analysts remain optimistic about Ally's future profitability, projecting an increase in earnings per share (EPS) from $3.16 in 2023 to $3.83 in 2024. The bank has also set aside $508 million for credit losses, reflecting prudent financial management during uncertain times.

Berkshire Hathaway itself boasts an impressive annual yield of around 20%, translating to cumulative returns of 3,787,464%. The firm's substantial investment in Ally Financial comes amid a period where the company's value has been slashed by half due to the impact of high-interest rates on the auto loan industry. Despite these headwinds, the consensus among Wall Street analysts supports a positive outlook for Ally Financial's path to profitability recovery.

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