Company Overview
Federal Agricultural Mortgage Corporation or Farmer Mac (AGM) was chartered by the United States Government in 1988 to be a secondary market in agricultural loans such as mortgages for agricultural real estate and rural housing. Farmer Mac is a stockholders-owned, government-sponsored enterprise. The company also works with the United States Department of Agriculture.
Business overview
Farmer Mac is in the business of purchasing loans from agricultural lenders and sells instruments backed by those loans. The company's main secondary market activities, which provide liquidity and lending capacity to lenders are:
- Purchase eligible loans directly from lenders;
- Providing advances against eligible loans by purchasing obligations secured by those loans;
- Securitizing assets and guaranteeing the payment of principal and interest on the resulting securities that represent interests in, or obligations secured by, pools of eligible loans; and
- Issuing long-term standby purchase commitments (LTSPC's) for eligible loans.
Farmer Mac conducts these activities through the following business segments;
- Farmer Mac & Ranch –Â under the Farmer Mac & Ranch, the firm commits to purchase agricultural mortgage loans or securities backed by agricultural mortgage loans. To be eligible for the Farmer Mac & Ranch line of business, loans must meet Farmer Mac's credit underwriting, collateral valuation, documentation and loan servicing requirements. Eligible collateral includes agricultural real estate that is used for production for the production of one or more agricultural commodities or products.
- USDA Guarantees – under the UDSA guarantees line of business the firms subsidiary Farmer Mac II LLC purchases the guaranteed portions of loans guaranteed by the Unite States Department Of Agriculture. These eligible USDA-guaranteed portions of loans includes the Farm Service Agency Guaranteed Farm Ownership, Operating Terms, and Conservation loans and Rural Development Business and Industry and Community Facility Guaranteed Loans.
- Rural Utilities – under the rural utilities line of business the firm purchases or commits to purchase, qualified rural utilities loans, or guarantees the timely payment of interest and principal of securities representing interests in or obligations backed by pools of such loans.
Source: Farmer Mac's website
The firm's activities are intended to provide lenders with an efficient and competitive secondary market that enhances these lenders' ability to offer competitively-priced financing to rural borrowers. After a decade of little quantifiable progress in expanding breadth and in 2013 the number of banks who sold banks who sold loans to AGM in 2013 nearly tripled to 220 from 80 in 2010. Eligible and approved sellers tripled by more than 600 and the dollar volumes of loan purchased between 2008 and 2013 increased as well. The top ten loan sellers in 2013 comprised just 53% of AGM's record $825 million in 2013 volumes. Today 75% of new loan and LTSPC transaction volume comes from non-FCS bank lenders. Farmer Mac fraction of U.S. agricultural banks working with the firm has tripled from 5% to 15% since 2010 and the firm's share of existing farm debt is still well under 5%.
Financials
For the nine months ending in September 2014, the firm revenues decreased 7% to $172.4 million and net income decreased 45% to $32.6 million. Revenues reflect interest margin; total decreased 48% to 0.48% and net interest spread decreased 3% to 0.83%. The firms net income reflects derivatives decreased from $22.5 million (income) to $12.5 million (expense).
Balance Sheet
| Period Ending: | 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Assets | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Assets | 13361.78 | 12622.2 | 11883.51 | 9479.91 | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Liabilities | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Liabilities | 13029.16 | 12271.09 | 11570.83 | 9242.89 | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Equity | 332.62 | 351.11 | 312.68 | 237.02 | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Liabilities & Shareholders' Equity | 13361.78 | 12622.2 | 11883.51 | 9479.91 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Common Shares Outstanding | 10.89 | 10.7 | 10.36 | 10.28 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Preferred Shares Outstanding | 0.06 | 0.06 | 0.06 | 0.21 | |||||||||||||||||||||||||||||||||||||||||||||
Income Statements
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Revenue | 235.4 | 264.67 | 274.69 | 238.71 | ||||||||||||||||||||||||||||||
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| Cost of Revenue, Total | 137.28 | 142.69 | 153.38 | 142.67 | ||||||||||||||||||||||||||||||
| Gross Profit | 98.12 | 121.98 | 121.31 | 96.04 | ||||||||||||||||||||||||||||||
| Total Operating Expenses | 138.43 | 148.99 | 150.98 | 151.85 | ||||||||||||||||||||||||||||||
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| Operating Income | 96.97 | 115.69 | 123.71 | 86.86 | ||||||||||||||||||||||||||||||
| Interest Income (Expense), Net Non-Operating | 33.06 | -25.45 | -80.03 | -20.37 | ||||||||||||||||||||||||||||||
| Gain (Loss) on Sale of Assets | 1.24 | 0.88 | 0.97 | 0.01 | ||||||||||||||||||||||||||||||
| Other, Net | - | - | - | - | ||||||||||||||||||||||||||||||
| Net Income Before Taxes | 131.27 | 91.12 | 44.65 | 66.5 | ||||||||||||||||||||||||||||||
| Provision for Income Taxes | 33.75 | 22.16 | 5.8 | 13.8 | ||||||||||||||||||||||||||||||
| Net Income After Taxes | 97.52 | 68.96 | 38.85 | 52.7 | ||||||||||||||||||||||||||||||
| Minority Interest | -22.19 | -22.19 | -22.19 | -20.71 | ||||||||||||||||||||||||||||||
| Equity In Affiliates | - | - | - | - | ||||||||||||||||||||||||||||||
| U.S GAAP Adjustment | - | - | - | - | ||||||||||||||||||||||||||||||
| Net Income Before Extraordinary Items | 75.33 | 46.77 | 16.66 | 31.99 | ||||||||||||||||||||||||||||||
| Total Extraordinary Items | - | - | - | - | ||||||||||||||||||||||||||||||
| Net Income | 75.33 | 46.77 | 16.66 | 31.99 | ||||||||||||||||||||||||||||||
| Total Adjustments to Net Income | -3.5 | -2.88 | -2.88 | -9.91 | ||||||||||||||||||||||||||||||
| Income Available to Common Excluding Extraordinary Items | 71.83 | 43.89 | 13.78 | 22.08 | ||||||||||||||||||||||||||||||
| Dilution Adjustment | - | - | - | - | ||||||||||||||||||||||||||||||
| Diluted Net Income | 71.83 | 43.89 | 13.78 | 22.08 | ||||||||||||||||||||||||||||||
| Diluted Weighted Average Shares | 11.21 | 11.02 | 10.8 | 10.62 | ||||||||||||||||||||||||||||||
| Diluted EPS Excluding Extraordinary Items | 6.41 | 3.98 | 1.28 | 2.08 | ||||||||||||||||||||||||||||||
| DPS - Common Stock Primary Issue | 0.48 | - | 0.2 | 0.2 | ||||||||||||||||||||||||||||||
| Diluted Normalized EPS | 6.23 | 3.92 | 1.2 | 2.08 | ||||||||||||||||||||||||||||||
Valuation
Value of Farmer Mac At Reasonable Multiples
| P/E at 10x Earnings | $64.10 |
| P/E at 10x Pretax Earnings | $117.20 |
| P/B at 1.5x | $37.78 |
Farmer Mac is selling for 7x its earnings, 1.0x its book value, and sells for about 2.6x its pretax earnings. The company should sell for 10x its earnings, 1.5x its book value and 10x its pretax earnings. Farmer Mac has a above return equity over the last 10 years, return on capital and as well a return on assets. The firm is highly profitable and efficent at managing its business and as long-as the company doesn't stray from its core business like Fannie Mae will do just fine. Farmer Mac privilege as a GSE enables the firm to above average profits from mundance activisties. The company is undervalued, and it's offering investora a 13% pretax return and also offering investors seven times the return that an investor can get from U.S. treasuries.
