The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
The government is about to sell a big stake in Ally Financial, the auto loan giant formerly known as GMAC, through an initial public offering. It's a victory for taxpayers who had to bail the company out at the height of the financial crisis.
But what about investors? Should you buy shares of Ally when it starts trading on the NYSE later this week under the ticker symbol ALLY (ALLY)?
Ally received $17.2 billion in bailout funds from the government's controversial Troubled Asset Relief Program (TARP).
Don't get me wrong, it's good news that the Treasury Department is unloading part of its Ally investment. Based on the $26.50 midpoint of Ally's projected price range of $25 to $28 a share, the government -- and by extension, taxpayers like you and me -- would raise just over $2.5 billion from the sale.
And that number is likely to go higher since the government may also sell another 14.5 million shares to the underwriters of the deal -- a long list that includes other former TARP beneficiaries such as Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC) and JPMorgan Chase (JPM).
So it's possible that the Treasury will finally eke out a profit from Ally. That's because Ally has already paid back $15.3 billion to the government.
But Ally is too risky a stock for the average investor to gamble on for several reasons.
1) Ally doesn't benefit at all from the IPO ... other than the positive PR related to no longer being in hock to Uncle Sam.
All the proceeds from the stock sale go directly to the government. Assuming the underwriters buy the additional 14.5 million shares, the Treasury's stake in Ally will be reduced from 36.8% to 14.1%.
This is a lot different from your usual IPO. Private companies typically go public in order to raise money that can be used for "general corporate purposes" such as acquisitions, hiring more workers, purchasing equipment or simply building up a war chest of cash. That's not happening here.
2) Consider the other (questionable) shareholders.
When you look at the other shareholders that own a big piece of Ally, you can't help but wonder if they may soon head for the exits once the stock is trading.
The second-largest investor is Third Point, the hedge fund run by activist Dan Loeb. Third Point is not selling any Ally shares in the IPO, but Loeb has a history of moving in and out of stocks quickly. That was the case with Herbalife (HLF) and Yahoo (YHOO), for example.
Third Point now owns 9.5% of Ally. According to a letter to the fund's shareholders earlier this year, the hedge fund accumulated the stake during the past six months of 2013.
The other big shareholder is private equity firm Cerberus Capital Management. It owns 8.6% of Ally and you'd have to think it's really itching to finish unwinding its position relatively soon since it first invested in GMAC way back in 2006.
Owning something for nearly a decade is like an eternity for a PE firm. Also, I can't say I'd completely trust the intentions of a company that shares its name with the mythical three-headed dog that guards the gates of the underworld. Was Beelzebub Capital Management already taken?
3) There's still a General Motors (GM) legacy issue. Even though GM no longer owns a stake in Ally, it still has ties to GM -- a company in recall crisis mode.
Ally offers financing for loans and leases to dealers that sell GM vehicles. That relationship could hurt Ally's loan volume if GM's recall problems eventually start to hurt auto sales.
4) IPO conditions aren't great for a company like Ally. Sure, it's been a pretty good year for certain IPOs, but a company similar to Ally that went public earlier this year has been a dud.
5) Ally's fundamentals and valuation aren't encouraging.
Ally reported a net profit of $361 million in 2013, down sharply from $1.2 billion in 2012.
Even if you back out a $98 million charge tied to a settlement with the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) regarding discriminatory auto loan practices for minorities, Ally still a posted steep drop in so-called core pre-tax income: from $850 million in 2012 to $606 million in 2013.
With that in mind, you'd think Ally should trade at a discount to other financial stocks. It doesn't. At a price of $26.50 a share and with a total of 481.5 million shares, Ally would have a market value of about $12.8 billion.
At that valuation, Ally would trade at 35 times last year's earnings. That's expensive for any stock, let alone a financial firm. And by way of comparison, Santander Consumer trades at just 11 times 2013 earnings.
So yes, the Ally IPO is good news for the Treasury Department and taxpayers. CEO Michael Carpenter also deserves a lot of praise for getting Ally back into good enough shape to make an IPO possible -- especially by clearing up the mess that was Ally/GMAC's mortgage unit ResCap, which filed for bankruptcy in 2012.
But that doesn't mean that we taxpayers should purchase the stock now.
Paul R. La Monica - Apr 9, 2013 12:40 PM ET
It's too early to tell whether investors can cash in as the U.S. Treasury cashes out of its stake in AIG (AIG).
But both the government and shareholders can claim hearty returns for now. AIG's stock is up more than 40% since January, even after falling 1% Tuesday. And the U.S. government will earn a profit of $15.1 billion when it sells the bulk of its stake in AIG tonight.
StockTwits traders MOREMaureen Farrell - Sep 11, 2012 3:51 PM ET
American International Group (AIG) said it will buy back up to $3 billion of its stock from the U.S. Treasury Friday as part of the government's offering of $4.5 billion of the insurer's shares on the open market.
The stock sale will move the U.S. government closer to a point where it would own just half of the insurer's shares outstanding. The Treasury Department currently holds a 61% stake in the MOREMaureen Farrell - Aug 3, 2012 4:21 PM ET
Catalonia appears poised to become the latest Spanish region to ask the central government for help paying its public debts, but the locals are not calling it a bailout.
The development, if confirmed, would make Catalonia the largest of Spain's 17 autonomous communities to request financial assistance from Madrid.
On Friday, Valencia became the first region to MOREBen Rooney - Jul 24, 2012 2:30 PM ET
Europe's financial problems are not over. Sure, a "Grexit" may now be off the table for a while following the New Democracy victory in the Greek elections Sunday. But Spanish 10-year bond yields continue to surge and are now above the psychologically important 7% barrier. Investors MOREPaul R. La Monica - Jun 18, 2012 12:48 PM ET
Super Mario to the rescue! European Central Bank president Mario Draghi said Friday that Europe's central banks stand ready to "continue to supply liquidity to solvent banks where needed."
Speaking at an ECB conference in Frankfurt, Draghi said strengthening European economic growth is a critical issue that needs to be addressed sooner rather than later.
"There is a long-standing agenda on growth" he said, adding that "it is time to implement it MORECatherine Tymkiw - Jun 15, 2012 8:23 AM ET
If a eurozone nation is bailed out in the middle of the Mediterranean and nobody hears it fall, does it make a sound?
Cyprus could soon become the latest, and smallest, member of the euro currency union to request a bailout from the European Union.
That would make the island nation of just over 1 million people the fifth euro area MOREBen Rooney - Jun 14, 2012 3:01 PM ET
Spain is well on the way to securing up to 100 billion euros from the European Union to bailout its banks. But yields on Spanish bonds are going up. What gives?
Germany. That's what.
Germany wants the money for Spain's bank bailout to come from the European Stability Mechanism, as opposed to the European Financial Stability Facility, according to an official in the German finance ministry.
"If you want to use the more MOREBen Rooney - Jun 11, 2012 3:22 PM ET
Spain plans to auction up to 2 billion euros worth of bonds Thursday in what could be an important test of the government's ability to raise money from investors.
Days after the Spanish treasury minister said the government is in danger of being shut out of the market, Madrid will offer between 1 billion and 2 billion euros worth of 2-year, 4-year and 10-year MOREBen Rooney - Jun 6, 2012 2:34 PM ET
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