On Thursday, September 13, analysts at Zacks reiterated their position on shares of American Capital Agency (AGNC). The firm reiterated its neutral rating on the stock and set a $37.00/share price target. An analyst's reiteration can sometimes result in a either a run-up or a sell-off depending on the position of the firm and more specifically the individual analyst, and in the wake of AGNC's reiteration, I wanted to highlight several of the positive catalysts behind my decision to strengthen my position in the company, and demonstrate how well AGNC outpaces several of the other mREITs.
American Capital Agency, which is based in Bethesda, Maryland, operates as a real estate investment trust (REIT). It invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities or by the United States government agency. The company funds its investments primarily through short-term borrowings structured as repurchase agreements. It has elected to be taxed as a REIT under the Internal Revenue Code of 1986. As a REIT, the company would not be subject to federal income tax, provided it distributes at least 90% of its taxable income to its shareholders. It is externally managed by American Capital AGNC Management, LLC, which is an affiliate of American Capital, Ltd. American Capital Agency Corp. was founded in 2008 and is based in Bethesda, Maryland.
Profit Margin Comparisons
In my opinion, the larger the profit margin, the more attractive the company, and the smaller the profit margin the more potential investors should be wary of establishing a position in the company. In the last 12 months, AGNC has demonstrated a profit margin of 87.94%, which in my opinion is a great number, especially when it comes to REITs. Not only has AGNC demonstrated a great profit margin, but it has also outpaced the competition within the mREIT sector. For example, Annaly Capital Management (NLY) only managed to demonstrate a profit margin of 50.98%, which when compared to AGNC, gets outpaced by a margin of nearly 1.72 to 1.
Operating Margin Comparisons
In my opinion, the larger the operating margin, the more attractive the company, and the smaller the operating margin the more potential investors should be wary of establishing a position in the company. In the last 12 months, AGNC has demonstrated an operating margin of 88.48%, which in my opinion is pretty good, especially when it comes to the REIT sector. Not only do I think the numbers are pretty solid, they also manage to outpace several of AGNC's competitors within the mREIT sector. For example, NLY had only managed to demonstrate an operating margin of 60.25%, and CYS Investments (CYS) has only managed to demonstrate an operating margin of 86.74%, both of which were outpaced by AGNC's operating margin of 88.48%.
By examining the numbers closer we'll notice that AGNC outpaces both NLY and CYS quite significantly. AGNC outpaces NLY nearly 1.46 to 1, and AGNC slightly outpaces CYS nearly 1.02 to 1, which in my opinion, clearly demonstrates a good enough reason to consider AGNC at current levels.
When it comes to the REIT sector, the most attractive catalyst for many potential investors is clearly the company's yield. These yields are generally not the 2.00% to 4.00% found in many Dow Jones Industrial Average stocks. AGNC currently carries one of the more attractive yields within the REIT sector, and it should be noted that the company outpaces a total of three companies when it comes to this fundamental catalyst.
In the last 12 months, AGNC has demonstrated a yield of 13.90% ($5.00), which in my opinion should be one of first catalysts to consider from an income driven standpoint. If we examine the yields of three direct mREIT competitors, we'll see that AGNC clearly outpaces all three. For example, AGNC has demonstrated yield of 13.90% ($5.00), whereas direct competitors NLY - 12.40% ($2.20), CYS - 13.70% ($2.00) and Invesco Mortgage Capital (IVR) - 12.40% ($2.60) have all demonstrated smaller yields.
Potential investors looking to establish a position in the REIT sector should always consider a company's profit and operating margins as well as a company's yield before deciding where and how to establish a long-term position. Based on the fundamental comparisons I've demonstrated, AGNC should be one of the first companies income driven investors should consider.