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With EPS Growth And More, Federal Agricultural Mortgage (NYSE:AGM) Is Interesting

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·4-min read
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Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

In contrast to all that, I prefer to spend time on companies like Federal Agricultural Mortgage (NYSE:AGM), which has not only revenues, but also profits. While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

See our latest analysis for Federal Agricultural Mortgage

Federal Agricultural Mortgage's Earnings Per Share Are Growing.

If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. That makes EPS growth an attractive quality for any company. Over the last three years, Federal Agricultural Mortgage has grown EPS by 6.0% per year. That might not be particularly high growth, but it does show that per-share earnings are moving steadily in the right direction.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). I note that Federal Agricultural Mortgage's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note Federal Agricultural Mortgage's EBIT margins were flat over the last year, revenue grew by a solid 25% to US$224m. That's a real positive.

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

earnings-and-revenue-history
earnings-and-revenue-history

While it's always good to see growing profits, you should always remember that a weak balance sheet could come back to bite. So check Federal Agricultural Mortgage's balance sheet strength, before getting too excited.

Are Federal Agricultural Mortgage Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

While we did see insider selling of Federal Agricultural Mortgage stock in the last year, one single insider spent plenty more buying. To wit, Independent Director James Engebretsen outlaid US$507k for shares, at about US$101 per share. That certainly pricks my ears up.

On top of the insider buying, it's good to see that Federal Agricultural Mortgage insiders have a valuable investment in the business. Indeed, they hold US$22m worth of its stock. That's a lot of money, and no small incentive to work hard. Even though that's only about 1.7% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Brad Nordholm is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations between US$1.0b and US$3.2b, like Federal Agricultural Mortgage, the median CEO pay is around US$3.5m.

Federal Agricultural Mortgage offered total compensation worth US$2.7m to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.

Should You Add Federal Agricultural Mortgage To Your Watchlist?

One important encouraging feature of Federal Agricultural Mortgage is that it is growing profits. On top of that, we've seen insiders buying shares even though they already own plenty. That makes the company a prime candidate for my watchlist - and arguably a research priority. Of course, just because Federal Agricultural Mortgage is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Federal Agricultural Mortgage, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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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