Farmer Mac's Q2 - Boring Wins Again, Shockingly Cheap

Summary

• Farmer Mac generated $2.40 in cash EPS and is well on its way to meeting my $9.15 estimate for this year.
• Despite the pandemic and fears about trouble on the farms, Farmer Mac had only one default during Q2.
• Loan growth this year-to-date is a healthy 8.5%.
• Despite Farmer Mac's consistently proven stability and growth, it is trading at only one-third of the market multiple.
• I believe the stock is worth double its current level. And don't forget the 4.6% dividend yield.

I've been writing recently about the magical thinking driving up tech stocks. Well, Farmer Mac (NYSE:AGM) is about the perfect anti-magic stock out there. And it delivered again with its second-quarter earnings report. I strongly recommend this stock as a very reasonable double from the current price.

First, a quick description for Farmer Mac newbies.

Farmer Mac is a relatively small company with a $750 million or so market cap. It makes mortgage loans to farmers and selected infrastructure loans to support rural communities. Critically, Farmer Mac is a government-sponsored enterprise, like Fannie Mae and Freddie Mac. Farmer Mac’s debt has the implicit support of the federal government, which means it has lower debt costs than its competitors. This benefit – a “moat” in modern investment parlance – shows up in the three key financial variables for a lending institution:

1. Extremely low loan losses. Farmer Mac’s chargeoff rate (loan losses as a percent of loans outstanding) averaged only 2 bp a year for the last two decades. This truly might be the lowest loss rate for any U.S. lender over that period. If you know of a lower chargeoff rate, please pass it along.
2. A stable interest margin. A lender takes interest rate risk, which evidences itself in swings in its interest margin. Farmer Mac uses some of the benefit of its cheap debt to carefully hedge against market interest rate swings. As a result, its interest margin is quite stable.
3. High leverage. Bank assets are typically about 10 times their capital level; the rest is borrowed, mostly from depositors. Farmer Mac’s leverage is 28 times, yet its regulators say that Farmer Mac has a material amount of excess capital. Farmer Mac can afford the leverage because of its low credit and interest rate risks.

The combination of ultra-low

Analyst’s Disclosure:I am/we are long AGM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.