AGNC Investment (AGNC) has drawn fresh attention after recent trading left the stock with a value score of 5 and an intrinsic discount of about 41%, prompting investors to reassess its income focused mortgage REIT profile.

At a share price of US$10.46, AGNC’s recent 1 day share price return of 1.45% and 7 day share price return of 3.46% sit against a year to date share price decline of 4.30%. Its 1 year total shareholder return of 28.99% and 3 year total shareholder return of 59.49% point to stronger income driven results over longer periods.

If you are comparing AGNC with income or financials focused ideas, it can help to widen the lens and scan the market using the 20 top founder-led companies

With AGNC trading at an estimated 41% intrinsic discount and sitting below the average analyst price target, the key question for you is whether this represents genuine value or whether the market is already factoring in future growth.

Price-to-Earnings of 9.2x: Is it justified?

AGNC currently trades on a P/E of 9.2x, which screens as inexpensive when set against both peers and an estimate of where that multiple could sit.

The P/E compares the share price to earnings per share and is one of the most direct ways to see how much investors are paying for current profits. For a mortgage REIT, this can be a useful shorthand for how the market is weighing the income profile and the risks in the funding and asset mix.

AGNC is described as good value on several fronts. Its P/E of 9.2x is lower than the US Mortgage REITs industry average of 11.5x and also below a peer average of 11.8x. In addition, the P/E is below an estimated fair P/E of 15x, a level the market could theoretically move towards if sentiment and fundamentals stay aligned with that fair ratio framework.

Result: Price-to-earnings of 9.2x (UNDERVALUED)

However, the income story can quickly be tested if funding costs, mortgage spreads or housing market conditions move against AGNC’s portfolio and leverage profile.

Another View: What Does The Cash Flow Say?

While the P/E of 9.2x suggests AGNC looks inexpensive, the SWS DCF model also points to the stock trading below an estimated future cash flow value of $17.69 per share. This implies a wide gap from the current $10.46 price. Is that a genuine opportunity or a sign that cash flow assumptions are demanding?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out AGNC Investment 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 47 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With both risks and rewards in the mix, does the current setup fit how you see AGNC and your own risk tolerance? Act quickly, review the underlying data, and pressure test your thesis against the 4 key rewards and 3 important warning signs

Looking for more investment ideas?

If AGNC is on your radar, do not stop there. Broaden your watchlist now so you are not relying on a single income story.

• Target long term quality by scanning for companies that combine strong fundamentals with a resilient balance sheet using the solid balance sheet and fundamentals stocks screener (48 results).
• Hunt for potential mispricing by reviewing the 47 high quality undervalued stocks and see which stocks currently line up with your return expectations and risk limits.
• Spot lesser known opportunities before the crowd by screening through the screener containing 20 high quality undiscovered gems that already show solid underlying metrics.

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.