• If you are wondering whether AGNC Investment at around US$10.62 is still offering value or if most of the upside is already priced in, the starting point is understanding how the stock is being valued today.
• AGNC Investment has been relatively steady in the short term, with the share price up 2.3% over the last week and 1.8% over the last month. The return over the past year sits at 31.1% and the three and five year returns are 61.0% and 22.8% respectively, with the stock down 2.8% year to date.
• Recent coverage of AGNC Investment has focused on how income focused investors view mortgage REITs in the current interest rate setting and what that means for dividend sustainability and book value sensitivity. That backdrop has put more attention on how closely the share price tracks changes in the underlying portfolio and funding conditions.
• AGNC Investment currently has a valuation score of 5/6, which reflects the number of checks where it screens as undervalued. The rest of this article will compare what different valuation approaches say about the stock while setting up an even more complete way to think about value at the end.

Approach 1: AGNC Investment Excess Returns Analysis

The Excess Returns model looks at how effectively AGNC Investment turns its equity base into earnings above the return required by shareholders. Instead of focusing on cash flows, it compares the profit generated on the company’s book value with the cost of equity.

For AGNC Investment, the starting point is a Book Value of $8.90 per share and a Stable EPS estimate of $1.53 per share, based on weighted future Return on Equity estimates from 6 analysts. That equates to an average Return on Equity of 16.21% on this equity base.

The model compares this with a Cost of Equity of $0.97 per share, implying an Excess Return of $0.56 per share. It also uses a Stable Book Value of $9.45 per share, sourced from weighted future Book Value estimates from 4 analysts, to anchor the long term earnings power of the business.

Combining these inputs, the Excess Returns valuation arrives at an intrinsic value of $17.77 per share for AGNC Investment. Against a current share price of about $10.62, this indicates that, on this model, the stock is 40.2% undervalued.

Result: UNDERVALUED

Our Excess Returns analysis suggests AGNC Investment is undervalued by 40.2%. Track this in your watchlist or portfolio, or discover 43 more high quality undervalued stocks.

Approach 2: AGNC Investment Price vs Earnings

For profitable companies like AGNC Investment, the P/E ratio is a useful yardstick because it links what you pay for the stock directly to the earnings the business is currently generating. Investors typically accept a higher or lower P/E depending on what they expect for future earnings growth and how much risk they see in those earnings.

AGNC Investment currently trades on a P/E of 9.36x. This sits below both the Mortgage REITs industry average P/E of 11.74x and a peer average of 11.77x, which suggests the stock is priced more conservatively than many comparable companies on an earnings basis.

Simply Wall St also calculates a proprietary “Fair Ratio” of 15.20x for AGNC Investment. This measure aims to reflect the P/E that would be consistent with the company’s earnings profile, taking into account factors such as growth, risks, profit margins, industry and market capitalization. Because it directly adjusts for these company specific drivers, it can give a more tailored view of value than simple comparisons with industry or peer averages. Against this fair ratio, AGNC Investment’s current P/E of 9.36x screens as lower.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your AGNC Investment Narrative

Earlier it was mentioned that there is an even better way to understand valuation. On Simply Wall St’s Community page you can use Narratives for AGNC Investment. Narratives let you link a clear story about the company to specific assumptions for future revenue, earnings and margins. You can convert that story into a financial forecast and fair value, compare that fair value with the current price to help decide whether to act, and then see it update automatically as new information such as news or earnings arrives. For example, one investor might build a Narrative around the higher analyst price target of US$11.00 with strong revenue and margin assumptions, while another might anchor on the lower US$8.25 target with more cautious expectations. Both can see in one place how their different views translate into numbers and a valuation that is easy to track over time.

Do you think there's more to the story for AGNC Investment? Head over to our Community to see what others are saying!

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.