STARS Transformation And Renewable Energy Growth Empower Ag Mortgage Innovator

Key Takeaways

• The STARS platform and securitization product are poised to enhance efficiency and market share, positively impacting earnings and operations.
  
• Focus on high-yielding loans, renewable energy, and proactive debt management could expand net margins and earnings, bolstering shareholder value.
  
• Political and market volatility, coupled with regulatory risks and expensive system upgrades, pose significant challenges to revenue and margin stability.

Catalysts

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

• The implementation of the STARS platform, a comprehensive transformation of core infrastructure, is expected to enable Farmer Mac to scale its business, enhance efficiency, and offer new product offerings, positively impacting earnings and operating efficiency.
  
• The strong pipeline and continued growth in the Renewable Energy segment suggest increased loan volume, which can drive higher revenues due to demand for renewable power generation and storage solutions.
  
• The development of a new securitization product may enhance capital efficiency and provide a competitive advantage in the agricultural mortgage market, potentially increasing fee income and expanding market share.
  
• The company's focus on high-yielding loan segments such as Farm & Ranch and Renewable Energy, coupled with proactive debt management to lower funding costs, is likely to expand net margins and improve earnings.
  
• Robust capital levels and strategic investments in technology and resources allow Farmer Mac to navigate changing economic conditions and support projected growth, potentially enhancing shareholder value through increased earnings and returns on equity.

Federal Agricultural Mortgage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Federal Agricultural Mortgage's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 49.0% today to 52.2% in 3 years time.
• Analysts expect earnings to reach $219.0 million (and earnings per share of $19.94) by about November 2027, up from $170.4 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 13.6x on those 2027 earnings, up from 13.4x today. This future PE is lower than the current PE for the US Diversified Financial industry at 17.4x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Federal Agricultural Mortgage Future Earnings Per Share Growth

Risks

• The shift in business composition towards higher spread loans, like renewable energy, could be offset by potential volatility in these sectors, impacting net margins if these loans face higher defaults or lower than expected returns.
  
• The maturing AgVantage product and volatile liquidity needs of counterparties might affect business volume negatively, thus impacting future revenue growth.
  
• The possibility of tariffs and a strong dollar impacting agricultural trade could reduce farm income and loan demand, which could harm revenue from the core Farm & Ranch segment.
  
• Political changes and potential shifts in agricultural policies could introduce regulatory risks, potentially affecting revenue and the broader financial environment in which Farmer Mac operates.
  
• The capital-intensive investment in new systems like STARS means that any underperformance or issues in implementation could lead to increased costs and impact net earnings negatively.

Valuation

• The analysts have a consensus price target of $218.0 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 2027, revenues will be $420.0 million, earnings will come to $219.0 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $210.33, the analyst's price target of $218.0 is 3.5% 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.