Broadband And Renewable Energy Focus Will Unlock New Opportunities

Key Takeaways

• Strategic expansions in Broadband and Renewable Energy are set to boost revenue, leveraging growing rural markets and renewable power demand.
  
• Renewable energy tax credits and FARM securitization enhancements are expected to improve profitability margins and earnings growth.
  
• Rising interest rates and regulatory risks in the agricultural and renewable sectors could dampen Farmer Mac's revenue and affect credit quality and earnings stability.

Catalysts

Provides a secondary market for various loans made to borrowers in the United States.

• The company expanded its business segments, including rebranding its Rural Utilities segment to Power & Utilities and introducing a new Broadband Infrastructure segment, which helps provide better transparency into the sources of net effective spread and profitability. This strategic alignment is expected to boost revenue as they target growing markets like telecommunications and data connectivity in rural areas.
  
• The strategic focus on renewable energy projects, including the growth of the Renewable Energy segment and the doubling of volume in this segment annually since its introduction in 2020, positions the company to benefit from ongoing market demand for renewable power generation and storage. This growth potential in the renewable energy market is expected to significantly impact future earnings.
  
• The introduction of renewable energy investment tax credits and the focus on identifying similar future opportunities will likely provide earnings growth and a reduction in effective tax rates. This strategic involvement in renewable energy credit opportunities is expected to enhance profitability margins.
  
• The company's commitment to maintaining its FARM securitization program with plans to introduce new securitization products and asset classes, such as those related to renewable energy, will likely enhance liquidity and funding flexibility, positively impacting earnings growth while optimizing the capital structure.
  
• The company's proactive management of its balance sheet and shift towards higher-spread business such as Broadband Infrastructure and Renewable Energy positions it well for potential net effective spread improvement, which is expected to positively impact net margins.

Federal Agricultural Mortgage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Federal Agricultural Mortgage's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 50.0% today to 50.9% in 3 years time.
• Analysts expect earnings to reach $230.0 million (and earnings per share of $20.94) by about March 2028, up from $180.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from 11.6x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Federal Agricultural Mortgage Future Earnings Per Share Growth

Risks

• The rising interest rate environment and its impact on the agricultural economy could dampen liquidity and loan demand, potentially reducing Farmer Mac's revenue growth.
  
• Tight credit spreads in investment-grade counterparties within the AgVantage product may result in lower business volumes and affect revenue streams.
  
• Increased operating and transaction costs, particularly in expanding into new business segments like broadband and renewable energy, could compress net margins if these expenses are not managed efficiently.
  
• The reliance on investment tax credits for renewable energy projects introduces regulatory risk; changes in tax policies could affect future earnings and profitability.
  
• While historical credit losses have been idiosyncratic, increased provision costs for substandard loans due to an economic downturn or specific borrower issues could adversely impact the overall credit quality and earnings stability.

Valuation

• The analysts have a consensus price target of $227.0 for Federal Agricultural Mortgage based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $451.6 million, earnings will come to $230.0 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 11.4%.
• Given the current share price of $192.8, the analyst price target of $227.0 is 15.1% higher.
• 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.