AGM Stock Analysis

By: EBS Invests

Overview:

The Standard and Poors 500 has run up ~14.5% year to date (YTD), and investors are struggling to find convincing stocks that are undervalued, high profit, high margin, and wide-market businesses that have not run up significantly in recent times. The age of buying excellent companies for fair value may be over. Some of my favorite companies, such as American Express (AXP), Microsoft (MSFT), Lam Research (LRCX), and others, have seen significant price increases YTD. However, I may have found the next best undervalued, high-growth, large-margin business that foots the bill for excellence.  

Averaging 14% per year in revenue compound annual growth rate (CAGR) over 10 years; with no negative year of revenue growth since 2014 and a dividend growth rate of 22%. Further, with a payout ratio of 34.5%, this stock will surely excite investors. Moreover, the company has a gross margin of 72% and a net margin of 50%. Furthermore, this stock has a low PE of 10.62. This stock is none other than Federal Agriculture Mortgage Corp., commonly known as Farmers Mac, and trades under the symbol $AGM.

You can see above how Farmers Mac has outperformed the S&P 500 every year since 2015 and has largely gone unnoticed by investors.  

Farmers Mac is not your normal stock, as the firm is a GSE or government-sponsored entity. Back in the 1980s, due to high interest rates and variable-rate loans, many farmers struggled to stay afloat financially. This then required a federal buyout of the industry and created the Federal Agriculture Mortgage Corp. Farmers Mac was created to help support farmers by offering, for the first time, fixed-rate loans at the lowest cost possible. Additionally, allowing for direct loan procurement from other firms and CO-OPs. The firm now has $30 billion in assets under management (AUM) and operates in the secondary market for financial firms.  

AGM directly purchases loans and other securities from over 1,000 firms, does all the underwriting to keep costs low, and sells these products to farmers and other rural organizations. Furthermore, as this is a GSE, it is overseen by Congress; which reduces the cost of borrowing money, which makes it cheaper for everyone involved. A better explanation of GSEs and how they relate to AGM can be found here for additional information.  

One may think the agricultural finance field is small; however, Farmers Mac operates in an industry that is worth over 350 billion USD and is a 50/50 split between GSEs and large banks & insurance companies et al,. (see above).

Farmer Mac’s business is split into four segments. They co-operate AgFinance, Farm & Ranch Loans, Rural Utilities, and Renewable Energy. A more in-depth explanation can be better explained here:  

“The company's Agricultural Finance line of business engages in purchasing and retaining eligible loans and securities; guaranteeing the payment of principal and interest on securities that represent interests in or obligations secured by pools of eligible loans; servicing eligible loans; and issuing LTSPCs for eligible loans.  

Its Rural Infrastructure Finance line of business is involved in the purchase of rural utility loans and renewable energy loans and guarantees of securities backed by loans, as well as LTSPCs for pools of eligible rural utility loans; loans for electric or telecommunications facilities by lenders organized as cooperatives to borrowers; and other financial institutions that are secured by pools of eligible loans (Stock Analysis).”  

In recent quarters, the CEO of the firm Bradford T. Nordholm has issued a statement acknowledging increasing net margin growth of ~400 basis points over 2 years and has stated that he expects that growth to slow down. However, he does not expect the margin expansion to go negative. Moreover, he issued an expectation for another year of growth of between 7% and 9%. The CEO is also very adamant about not focusing on quarterly results, as he is more focused on having a successful year. Further, he does not show quarter-to-quarter updates on graphics, as every quarter is different. I find this to be interesting and a nice change from trying to beat the street every quarter. Additionally, the firm plans to focus more on high-margin parts of the business as they further finance green energy production across the United States.

Financials and dividend information: ** 

Revenue year over year (Yr/Yr) has grown at 18.52% in recent years, and AGM had its best year ever in 2023 with a record 350 million USD in revenue, up from 308 million USD a year prior. Furthermore, revenue this year in Q1 24 (March 31, 2024), is up ~14% Yr/Yr. Expectations for 2024 revenue for the firm are to be around 375 million USD (growth of +25 million USD in one year or ~+7%).

Earnings per share (EPS) have also increased very nicely, with a 5-year CAGR of 13%. Expectations for 2024 are ~6% EPS growth.

Dividend growth and the dividend itself for this stock are stellar. With a ~3.22% dividend yield and an annual dividend of $5.60 (paid quarterly) of $1.40 per share. The dividend growth is phenomenal, with a dividend CAGR of 22%. The most recent dividend increase bumped the dividend payout by 27.27% to $1.40 per share per quarter. The CEO is also very adamant about paying back high net profits to shareholders in the form of nice dividend increases. As on record, the lowest increase was in 2022, at 8%, and that is still a very respectable increase.  

Moat Review:

Due to AGM's special GSE style as a company and their market offerings coupled with a highly regulated environment, that has high barriers to entry, high start-up costs, and lots of regulatory red tape. Further, smaller firms that do similar things do exist; however, most cannot do the underwriting for their loans. This, however, is done by Farmers Mac, which makes their product offerings cheaper, and they also buy loans and other securities from their competition. AGM is also one of the only publicly traded GSE making it a unique option. However they do not have large pricing power in this market and cannot be seen as a highly dominant force considering their market share; therefore, I give this moat wider than normal, although it is not a wide moat in the sense of JPMorgan Chase or other large financial institutions it still offers a wider than normal moat that still has an edge over normal investments.

Moat rating: wider than normal 

Valuation: 

AGM currently trades with a PE of 10.60 and a forward PE of 10, which is far below my maximum threshold of 25. They do have a high debt-to-equity ratio of 18.80, which has decreased slightly. However, I am not concerned about their high debt, as mortgage firms need to take on debt to sell it to make money. Their free cash flow is nice at 3.36, meaning a high value per share. Moreover, the firm's price to book is a little more expensive at 1.25, meaning the stock is slightly overvalued; however, this is overshadowed by their price to sales of 5.10, which shows an expensive per-dollar cost. Making AGM on the ratio sides of the calculation expensive. However, valuing financial firms is always difficult due to their high debt nature.   

The firm has a great FCF (Free Cash Flow) yield of ~30% and a solid return on equity of 12.80%.

Using a 7% growth an adjusted PE growth of 7 (usually 8.5) and a growth multiplier of 1.5 (normally 2) to adjust for higher interest rates, tighter credit situations, and uncertainty in the US economy. Therefore with those calculations in place along with the updated AAA Corporate Bond Yield of 5.25%, I get this result below:

Above, you can see that my model predicts that AGM is worth $240 a share, with a maximum purchase price of ~$190. Sadly, due to this stock's nature of being less than a billion in revenue, large analyst firms like MorningStar, CFRA, and others have no price targets commonly available. However, Yahoo Finance has a mean price target of $222 for the firm. After averaging those together, I got a price target of ~231 with an average combined maximum purchase price of $185. Currently, AGM is trading for around $170 per share.  

Disclosure: I have been acquiring shares under $175 and plan to add more to this position over the next few weeks. I currently have 3 shares at an average of an average of $174 in my Roth IRA and broker account.

Risk’s: 

The president of the company, during the 2024 Investor Day Meeting in May, made it clear that Farmers Mac is one of the most stable, high-growth companies one can invest in. However, that comes from a person with rose-tinted glasses. However, I do tend to agree with his statement. AGM is a firm that is overseen by Congress and is partly associated with the government. Meaning it technically cannot go bankrupt or fail. AGM is also the only publicly traded GSE that allows investors to invest in rural infrastructure and agriculture.  Although other GSEs such as Fannie May (FNMA) now trade as a penny stock on the over-the-counter (OTC) market after the 2008 financial crisis and have never fully recovered. It is entirely possible that AGM could suffer the same fate.

However, the risks associated with this are another 2008-style crash. As seen in the “AGM Max Revenue Chart,” you can notice how revenue went negative for the year, but quickly rebounded the next year. You are looking at a company that buys loans and securities from one thousand plus financial institutions, bundles them, and sells them to farmers and rural projects for below-market-rate costs. Therefore, the risks associated with this stock are liquidity risks in the essence of a bank run, credit risk in the quality of AGMs loans, higher than normal interest rates that hurt those interested in taking on loans, and regulatory risk, as it is a GSE. Thus, making AGM a medium-risk firm. They have low capital expenditures and keep growing the business by taking on debt and selling it. Their risk is comparable to that of any other financial firm that lends.  

As this business deals with credit and debt, it is important to note that AGM has some of the lowest credit delinquency rates in the industry. Moreover, it is lower than most banks and farm credit systems. Allowing for the most stable option when investing in a financial institution. Below, you can see a graph and notice how Farmers Mac falls under the competition in every fiscal year.  

Conclusion:

As we investors seek out opportunities to find value in the stock market and invest in these companies, we need to find and invest in highly profitable, high-growth, high-margin businesses that have a competitive advantage. Federal Agriculture Mortgage Corp. offers that investment opportunity to us as the only GSE publicly traded company. Moreover, their ability to keep growing and not have a losing year since 2014 is amazing. Coupled with their 18.5% return CAGR and near 22% dividend CAGR, this stock is a compounder.  

As the United States moves toward green energy and routine developmental projects take place; AGM is well suited to take advantage of this change. Seen below, you can see how the company plans to grow this segment in blue, along with their bread & butter ranch and farm loan side of the business. 

Farmers Mac offers a highly profitable business that is overseen by the government, which allows it to offer below-average loan rates that are favorable to customers. Moreover, its high net margin makes it extremely attractive. I like to own companies like these, and AGM is incorrectly priced by Mr. Market. The fair value of this firm is far higher than what it currently trades at. The management team is optimistic about the future, never a poor year in recent times, and a strong focus on yearly results over quarterly ones. Therefore making AGM a stock every investor should investigate. Worst case, you get paid a nice dividend that increases year over year while you wait for the stock price to reflect its current intrinsic value. 

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EBS Invests est 2023//

NOT A FINANCIAL ADVISOR.

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