Annaly Capital Management stock has delivered a 73.6% return over the past three years, while the current intrinsic value estimate from the Excess Returns model and the earnings based multiples both point to the shares trading at a discount to assessed fair value. At the same time, Annaly scores a mixed result on the broader valuation checks, which keeps the debate open on how much of that discount is usable for investors.

• A 73.6% return over three years suggests Annaly Capital Management has already rewarded patient shareholders, so the key issue is how much upside is left if the current discount to intrinsic value closes.
• Annaly's valuation can benefit if investors maintain confidence in its ability to generate recurring interest income from its mortgage portfolio, while any rise in perceived credit or funding risk may limit how much the market is willing to pay for that income stream.
• The stock screens as undervalued on the Excess Returns model and on market multiples. However, a value score of 4 out of 6 points to a mixed picture rather than an across the board bargain.

The issue now is whether Annaly Capital Management's recent gains already reflect the key positives, or if the current discount to intrinsic value still offers a meaningful margin of safety.

Is Annaly Capital Management Still Cheap on Excess Returns?

The Excess Returns model values Annaly Capital Management by comparing what it is expected to earn on its equity base with the return that shareholders require. For Annaly, the inputs show a Book Value of $20.15 per share and a Stable EPS of $3.10 per share, based on weighted future Return on Equity estimates from 4 analysts. That lines up with an Average Return on Equity of 15.15% on a Stable Book Value of $20.44 per share, which is comfortably above the cost of equity.

The model assumes a Cost of Equity of $1.84 per share and an Excess Return of $1.26 per share. When these excess returns are capitalised, the Excess Returns framework arrives at an intrinsic value of $44.10 per share. Compared with the current share price, this implies the stock is 47.8% undervalued.

On this Excess Returns view, Annaly Capital Management stock currently screens as undervalued relative to its assessed intrinsic value.

Our Excess Returns analysis suggests Annaly Capital Management is undervalued by 47.8%. Track this in your watchlist or portfolio, or discover 49 more high quality undervalued stocks.

Is Annaly Capital Management Still Cheap on Earnings?

The P/E multiple is a useful way to look at Annaly Capital Management because earnings are a key driver of how investors value mortgage REITs. Annaly currently trades on a P/E of 6.2x, which is very close to the peer average of 6.2x and below the Mortgage REITs industry average of 8.8x. That points to the stock being priced at a lower earnings multiple than many other companies in its sector.

The fair P/E ratio from the model is 11.8x, which is materially higher than Annaly's current 6.2x. This gap suggests the market is attaching a lower multiple to Annaly's earnings than the model implies could be justified given its characteristics and risk profile. For investors comparing income focused stocks on earnings power, that difference in P/E may be an important part of the Annaly Capital Management valuation story.

On the P/E multiple, Annaly Capital Management stock currently appears undervalued relative to the earnings-based level suggested by the model.

The Annaly Capital Management Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Annaly Capital Management pick up where the valuation puzzle leaves off and explain which assumptions about Annaly Capital Management's future growth, margins and earnings would need to hold for the stock to be worth materially more or materially less than today's market price. Each narrative links its number to a clear view on how growth, profitability and risk could develop. You can revisit these views on the Community page as new information becomes available.

Share a narrative on Annaly Capital Management and include your own number-driven view on where its growth, margins, and execution may go from here. Add your voice to the Simply Wall St community and see how your thesis holds up as new results come through.

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

The Bottom Line

Annaly Capital Management screens as undervalued on both the intrinsic value estimate from the Excess Returns model and on earnings based multiples, which point in the same direction. The bigger question for you is whether that apparent discount fairly reflects the risks around Annaly's mortgage portfolio, funding costs and interest rate sensitivity. If you think the market is overpricing those risks, the current gap to intrinsic value and to the model fair P/E may be attractive. If you are more cautious, the mixed broader valuation checks suggest treating the stock as a higher risk income vehicle where the discount could persist.

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.