Fed's Accommodative Policy Will Improve Predictability Of Agency MBS Returns

Key Takeaways

• Stable interest rates and balanced supply-demand outlook for Agency MBS could enhance AGNC's revenue and earnings by improving return predictability and maintaining attractive yields.
  
• AGNC's strategic asset and hedge management, along with potential equity issuance, may maximize risk-adjusted returns, boosting earnings and shareholder value.
  
• AGNC Investment faces revenue challenges due to interest rate volatility, reliance on treasury-based hedges, and uncertainties in U.S. fiscal policy and housing finance.

Catalysts

Provides private capital to housing market in the United States.

• The Fed's accommodative monetary policy and declining inflationary pressures have reduced interest rate volatility and steepened the yield curve, potentially enhancing AGNC's revenue and earnings as stable interest rates can improve the predictability of returns on mortgage-backed securities.
  
• The supply and demand outlook for Agency MBS is expected to be well balanced in 2025, with potential positive surprises from bank demand due to less onerous regulation, which could support revenue growth and stabilization of earnings by maintaining attractive investment yields.
  
• The company plans to leverage current Agency spreads within a well-defined trading range, offering potentially attractive returns for levered and unlevered investors. This could positively impact AGNC's net margins if spreads remain stable.
  
• There is potential for AGNC to take advantage of accretive equity issuance opportunities given premium to tangible net book value, potentially enhancing book value per share, which can improve earnings and shareholder returns moving forward.
  
• AGNC's strategic shift towards adding higher coupons and managing a balanced hedge portfolio is expected to maximize risk-adjusted returns in a stable interest rate environment, thereby potentially boosting earnings and enhancing net interest margin.

AGNC Investment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AGNC Investment's revenue will grow by 26.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 75.1% today to 78.7% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $1.37) by about February 2028, up from $731.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, down from 12.2x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 8.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

AGNC Investment Future Earnings Per Share Growth

Risks

• AGNC Investment's comprehensive loss of $0.11 per common share in the fourth quarter, along with a negative economic return on tangible common equity of 0.6%, indicates potential pressure on earnings and net margins.
  
• The volatility in interest rates and modestly wider Agency spreads in the fourth quarter led to slightly negative economic returns, which could continue to negatively impact revenue and investment returns if these conditions persist.
  
• Uncertainty regarding U.S. fiscal policy, deficit spending, and treasury issuance, compounded by the presidential election, could increase the risk of fluctuations in interest rates and Agency MBS spreads, potentially affecting AGNC's revenue stability.
  
• Concerns about changes in the U.S. housing finance system, particularly regarding the GSE conservatorships, could introduce additional volatility and unpredictability into the mortgage-backed securities market, affecting future revenue streams.
  
• The reliance on treasury-based hedges, which offer lower spreads compared to swap-based hedges, has resulted in decreased net spread and dollar roll income, potentially impacting the company's net interest margin and overall earnings.

Valuation

• The analysts have a consensus price target of $10.17 for AGNC Investment based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $9.97, the analyst's price target of $10.17 is 1.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.