AGNC Raised to Outperform - Analyst Blog

We have recently changed our long-term recommendation for American Capital Agency Corp. (AGNC), a leading real estate investment trust (REIT) that focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs), from ‘Neutral' to ‘Outperform' as we anticipate it to perform well above the broader market. The stock presently has a Zacks #3 Rank, which translates into a short-term ‘Hold' rating.

In the last 30 days, fiscal 2010 earnings estimates of American Capital have been increased by 8 of the 13 analysts covering the stock, while only one has lowered the same. For fiscal 2011, earnings estimates were revised upward by 8 of the 12 analysts covering the stock, while 3 had revised it downward. This indicates a clear positive directional movement for the fiscal earnings.

The magnitude of the earnings estimates has also increased by 38 cents for fiscal 2010 and 18 cents for fiscal 2011 to $5.88 and $4.62, respectively, in the last 30 days. This indicates that the analysts are bullish about the long-term performance of the company.

American Capital invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae (FNMA), Freddie Mac (FMCC) and Ginnie Mae. Specifically, American Capital invests in FMCC Gold certificates, FNMA certificates, and Ginnie Mae certificates.

We like the company's focused investment approach, which is not distracted by originations, servicing, or credit risk from investments in mortgages that do not have the backing of the U.S. government. American Capital is externally managed by American Capital Agency Management, a wholly-owned subsidiary of American Capital Ltd. (ACAS), an $18 billion publicly traded asset management company.

Agency residential lenders like American Capital are the only residential mortgage REITs left with a viable business model, more specifically, with access to capital to fund growth during recession and still having liquid assets. With the government takeover of Freddie and Fannie, its securities now have an explicit government guarantee, which makes agency REITs a much more attractive prospect for investors. Additionally, the company's portfolio of government-backed assets is relatively liquid and credit risk is limited.

However, the residential mortgage market in the U.S. has experienced defaults, credit losses and liquidity concerns, which have reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate related assets, including agency securities and other high-quality RMBS (residential mortgage-backed securities) assets.

As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance of American Capital Agency in the future.

 
AMER CAP LTD (ACAS): Free Stock Analysis Report
 
AMER CAP AGENCY (AGNC): Free Stock Analysis Report
 
FREDDIE MAC (FMCC): Free Stock Analysis Report
 
FANNIE MAE (FNMA): Free Stock Analysis Report
 
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