Freddie Mac (FMCC): Assessing Valuation Following $707 Million SCRT Deal and Portfolio Risk Shift

If you have been keeping an eye on Federal Home Loan Mortgage (FMCC) lately, you might have noticed a fresh spark of interest after the company priced its latest $707 million Seasoned Credit Risk Transfer Trust (SCRT). This deal packages up thousands of modified, re-performing loans into both guaranteed and non-guaranteed securities, marking another step in Freddie Mac's ongoing strategy to manage risk in its mortgage investments portfolio. It is a nuanced move, aimed at reducing exposure to less-liquid assets and reinforcing its approach to credit risk management.

Over the past year, Federal Home Loan Mortgage's share price has grown 9%, with momentum especially evident in recent months. The stock has gained 33% in the past month and over 51% in the past three months. That's quite a run for a name in the financial sector, especially after a long period of relatively muted returns. While Freddie Mac’s income trends remain mixed, with annual net income growth but still posting losses, this SCRT transaction highlights its ongoing efforts to shore up the balance sheet and navigate evolving market risks.

Given the stock's recent upswing, is there more room for upside now, or is the market already baking in these improvements? Let's dig into the valuation picture and see what the numbers really show.

Price-to-Sales of 1.7x: Is it justified?

Federal Home Loan Mortgage currently trades at a Price-to-Sales (P/S) ratio of 1.7x, which is significantly below both the US Diversified Financial industry average of 2.9x and the peer average of 4.4x. This suggests that, by this popular valuation yardstick, the stock is undervalued relative to its peers and sector.

The Price-to-Sales ratio compares a company’s market capitalization to its total revenue. For firms like Federal Home Loan Mortgage, where profits are currently negative and earnings-based valuation multiples are less meaningful, the P/S ratio helps measure how much investors are willing to pay for each dollar of revenue. This is particularly useful in industries where earnings can be volatile or negative due to one-off events or cyclical downturns.

A lower P/S ratio compared to industry and peer averages could indicate that the market is overly cautious about the company's future sales prospects, or it may be discounting ongoing challenges faced by Federal Home Loan Mortgage. However, the data signals that based on this multiple, the stock appears cheap relative to its sector. This point could attract value-oriented investors searching for potential upside if sentiment improves.

Result: Fair Value of $77.14 (UNDERVALUED)

See our latest analysis for Federal Home Loan Mortgage.

However, ongoing net losses and a discount to analyst price targets mean headwinds remain. Investor sentiment could shift quickly if fundamentals deteriorate.

Find out about the key risks to this Federal Home Loan Mortgage narrative.

Another View: What Does the SWS DCF Model Say?

While the price-to-sales ratio paints Federal Home Loan Mortgage as undervalued, our DCF model reaches a similar undervalued conclusion using a different lens. However, it is worth considering whether market expectations are missing something, or if the gap is set to close soon.

Look into how the SWS DCF model arrives at its fair value.

Stay updated when valuation signals shift by adding Federal Home Loan Mortgage to your watchlist or portfolio. Alternatively, explore our screener to discover other companies that fit your criteria.

Build Your Own Federal Home Loan Mortgage Narrative

If you have a different take or prefer your own analysis, you can quickly dive in and shape your own narrative in just a few minutes. Do it your way.

A great starting point for your Federal Home Loan Mortgage research is our analysis highlighting 1 key reward and 2 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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