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Piper Jaffray initiates coverage of Ally Financial, Santander Consumer USA

Piper Jaffray & Co. has initiated coverage of Ally Financial Inc. and Santander Consumer USA Holdings Inc. with ratings of "overweight" and "neutral," respectively.

Both companies are focused on auto loans and are exposed to macroeconomic trends, analyst Kevin Barker wrote, and while Ally's stock could rise quickly in a slightly better environment, Santander Consumer's net charge-offs could keep rising despite the stricter lending standards it implemented.

Ally currently trades at a steep discount to large banks and other consumer lenders, implying a high upside for the shares. Its earnings multiple could double or triple if credit costs level out, which would in turn give investors a better sense of the company's performance and would likely send the stock higher, he wrote.

Ally could also use capital to buy back stock as it waits for a better auto environment to emerge, which would increase its tangible book value and directly benefit shareholders.

Barker set a price target of $25 for the stock. His EPS estimates for 2017 and 2018 are $2.14 and $2.59, respectively.

Santander Consumer is also "attractively priced," Barker wrote, but shrinking origination volumes and rising net charge-offs are dampening the stock. Even though the company tightened its underwriting standards in 2015 and 2016, net charge-offs were 1.0% higher year over year in the first quarter.

The company's focus on subprime loans also makes it more sensitive to credit volatility. "Risk-adjusted returns have not hit levels where we can comfortably say earnings are moving higher," the analyst wrote.

Santander Consumer's price target was set at $13.50, while the analyst set EPS estimates for 2017 and 2018 of $1.56 and $1.61.