Mortgage rate shift and what it could mean for Federal Home Loan Mortgage

Federal Home Loan Mortgage (FMCC) has drawn fresh attention after its latest Primary Mortgage Market Survey showed the 30 year fixed-rate mortgage averaging 6.11%, described internally as the lowest level in years.

Despite the mortgage survey pointing to improved affordability, Federal Home Loan Mortgage’s recent share price return has been weak, with a 30 day share price return of a 27.76% decline and a year to date share price return of a 29.08% decline, while longer term total shareholder return over five years remains strongly positive.

If this rate news has you thinking about where else capital could go to work, it may be worth scanning our screener of 24 power grid technology and infrastructure stocks for other interest rate sensitive ideas.

So with mortgage rates easing, a recent share price slide, and a value score of 5 alongside an intrinsic discount of 94%, is FMCC quietly underappreciated, or already reflecting all the future growth the market expects?

Preferred Multiple of 1.1x P/S: Is it justified?

On the numbers provided, Federal Home Loan Mortgage screens as cheap on sales, with a P/S ratio of 1.1x at a last close of $7.34.

P/S compares the company’s market value to its revenue, so for each dollar of sales investors are currently paying about $1.10. For a secondary mortgage market player that is currently loss making, this can be a useful way to think about valuation when earnings do not yet offer a clean signal.

Several data points point to a low market expectation being priced in. FMCC is unprofitable and losses have grown over the past five years. It is forecast to remain unprofitable, and revenue is forecast to grow at 0.6% per year, slower than both the broader US market and high growth thresholds. Against that backdrop, the SWS fair P/S ratio sits at 4.8x, much higher than the current 1.1x level, and the SWS DCF model suggests a fair value of $123.67 versus the current $7.34 share price. Those gaps indicate the market is valuing FMCC well below what these models and fair ratio estimates imply could be justified if their assumptions play out.

Compared with peers, the discount looks even clearer. FMCC’s 1.1x P/S stands below the US Diversified Financial industry average of 2.5x and below a peer average of 3.1x. This points to investors assigning it a lower valuation multiple than similar names. If sentiment or fundamentals move closer to the SWS fair P/S ratio of 4.8x, that would represent a very different pricing anchor from where the stock trades today.

Result: Price-to-sales ratio of 1.1x (UNDERVALUED)

However, there are clear risks here, including ongoing losses, with net income at a loss of US$34, and a 29.08% year to date share price decline.

Another way to look at value

That 1.1x P/S already presents Federal Home Loan Mortgage as inexpensive on a sales basis, but our DCF model indicates an even larger gap, with a fair value estimate of $123.67 compared to the current $7.34 share price. If both measures point in the same direction, it raises the question of whether the market is being overly cautious or the models are too optimistic.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Federal Home Loan Mortgage for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 53 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Federal Home Loan Mortgage Narrative

If you see the data differently or simply prefer to piece things together yourself, you can build a custom view of FMCC in minutes: Do it your way.

A great starting point for your Federal Home Loan Mortgage research is our analysis highlighting 2 key rewards and 2 important warning signs that could impact your investment decision.

Looking for more investment ideas?

If FMCC has caught your attention, do not stop there. The same tools can help you spot other opportunities before they sit on everyone else’s radar.

• Target quality at a discount by scanning companies our screener flags as 53 high quality undervalued stocks with strong fundamentals already laid out for you.
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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.