AGM - Federal Agricultural Mortgage Corp (Farmer Mac)

[Guest Schwab711]

This is the non-voting common equity of Farmer Mac, a Government Sponsored Entity (GSE; the farmer's equivalent of Fannie/Freddie).

 

AGM is the secondary market for loans/mortgages for farmers (exactly like Fannie/Freddie for mortgages). Their portfolio is ~$20b and they have nearly negligible NPLs. Some history seems appropriate for this idea however. AGM was founded in 1988 following the farming bubble of the 1980's (and why AGM is so cheap currently). The issue is whether the underlying value of the assets held against the loans will drastically fall as rates rise. AGM is a GSE so it has implicit backing of the US government, but that will likely be irrelevant for equity investors as any bailout will surely wipe them out. However, as a GSE, AGM has a federally granted monopoly and financing competitive advantage for serving the secondary market of farming loans and mortgages. If the current farming prices are more reasonable then what is being whispered then AGM will see significant appreciation over the next few years.

 

AGM is generally valued on P/B basis and has generally traded between 1.3x - 1.8x P/B will currently trading at ~1x. Current book value includes a high % of recently transacted loans that the market fears is based on overvalued assets. Also, because NPLs have been historically trivial, AGM has a negligible amount of loss allowances such that nearly all MTM or loan losses will be absorbed from shareholder's equity.

 

AGM Key Facts:

Core Earnings: ~$50m (relatively unchanged since FY2011)

Equity: $582.5m (I think it's $332.5m after recent $250m preferred retirement)

ROE: Has historically been ~17% and will likely return to 17%-20% range since they just retired $250m in Preferred stock

P/E: <7x (same as fwd P/E)

BV Growth: ~6%-7% CAGR over 10 years

 

Volume of business is currently ~$15b with low loan loss reserves meaning a 4% decline could wipe them out! Since they cherry-pick farming loans, I think the odds of this a fairly low even if you assume farming land is in bubble territory. Either way, this is a seriously contrarian play as it is almost universally assumed that farming land is overpriced because of low rates. If rates increase slowly then AGM will perform admirably. If rates increase too quickly then the equity will likely be wiped out. FV is probably closer to $50/shr based on historical ROE, core earnings growth, and the fact that it is a GSE. AGM is probably the best way to add agriculture exposure to your portfolio.

 

https://www.farmermac.com/docs/default-source/events-and-presentations/farmer-mac-non-deal-roadshow-equity-presentation-march-2015.pdf?sfvrsn=2

https://www.farmermac.com/docs/default-source/default-document-library/latest-quarterly-report-on-form-10-q.pdf?sfvrsn=0

https://www.farmermac.com/docs/default-source/default-document-library/latest-annual-report-filed-on-form-10-k.pdf?sfvrsn=0

http://en.wikipedia.org/wiki/Farm_Credit_System

http://en.wikipedia.org/wiki/Federal_Agricultural_Mortgage_Corporation

[netnet]

This is my 2 cents and it may be worth less than that even:

 

It looks like you are shooting for a 30% return (assuming return to normalized conservative P/B, i.e. back to the bottom range of historic average) over an unknown length of time, i.e. no catalyst.  For this you have to either predict their underwriting ability or farm prices. 

 

That's going in the too hard pile for me.