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Investors are often guided by the idea of discovering ‘the next big thing’, even if that means buying ‘story stocks’ without any revenue, let alone profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.
If this kind of company isn’t your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Federal Agricultural Mortgage (NYSE:AGM). While this doesn’t necessarily speak to whether it’s undervalued, the profitability of the business is enough to warrant some appreciation – especially if its growing.
How Fast Is Federal Agricultural Mortgage Growing?
If you believe that markets are even vaguely efficient, then over the long term you’d expect a company’s share price to follow its earnings per share (EPS) outcomes. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. We can see that in the last three years Federal Agricultural Mortgage grew its EPS by 8.2% per year. That’s a good rate of growth, if it can be sustained.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. It’s noted that Federal Agricultural Mortgage’s revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. Federal Agricultural Mortgage maintained stable EBIT margins over the last year, all while growing revenue 17% to US$260m. That’s progress.
The chart below shows how the company’s bottom and top lines have progressed over time. Click on the chart to see the exact numbers.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Federal Agricultural Mortgage Insiders Aligned With All Shareholders?
It’s said that there’s no smoke without fire. For investors, insider buying is often the smoke that indicates which stocks could set the market alight. Because often, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.
While Federal Agricultural Mortgage insiders did net US$70k selling stock over the last year, they invested US$336k, a much higher figure. You could argue that level of buying implies genuine confidence in the business. It is also worth noting that it was Independent Director Robert Sexton who made the biggest single purchase, worth US$233k, paying US$117 per share.
On top of the insider buying, it’s good to see that Federal Agricultural Mortgage insiders have a valuable investment in the business. To be specific, they have US$15m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. While their ownership only accounts for 1.4%, this is still a considerable amount at stake to encourage the business to maintain a strategy that will deliver value to shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. That’s because on our analysis the CEO, Brad Nordholm, is paid less than the median for similar sized companies. Our analysis has discovered that the median total compensation for the CEOs of companies like Federal Agricultural Mortgage with market caps between US$400m and US$1.6b is about US$4.0m.
Federal Agricultural Mortgage’s CEO took home a total compensation package worth US$3.2m in the year leading up to December 2021. That is actually below the median for CEO’s of similarly sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when it’s reasonable, that gives a little more confidence that leadership are looking out for shareholder interests. Generally, arguments can be made that reasonable pay levels attest to good decision-making.
Does Federal Agricultural Mortgage Deserve A Spot On Your Watchlist?
As previously touched on, Federal Agricultural Mortgage is a growing business, which is encouraging. On top of that, we’ve seen insiders buying shares even though they already own plenty. That should do plenty in prompting budding investors to undertake a bit more research – or even adding the company to their watchlists. Now, you could try to make up your mind on Federal Agricultural Mortgage by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
Keen growth investors love to see insider buying. Thankfully, Federal Agricultural Mortgage isn’t the only one. You can see a a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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