Federal Agricultural Mortgage Corporation (NYSE:AGM) and Nelnet, Inc. (NYSE:NNI) are the two most active stocks in the Credit Services industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AGM to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, NNI is expected to grow at a -5.92% annual rate. All else equal, AGM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Federal Agricultural Mortgage Corporation (AGM) has an EBITDA margin of 199.9%, compared to an EBITDA margin of 110.98% for Nelnet, Inc. (NNI). This suggests that AGM underlying business is more profitable. AGM’s ROI is 0.50% while NNI has a ROI of 1.00%. The interpretation is that NNI’s business generates a higher return on investment than AGM’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. AGM’s free cash flow (“FCF”) per share for the trailing twelve months was -1.78. Comparatively, NNI’s free cash flow per share was +0.19. On a percent-of-sales basis, AGM’s free cash flow was -0.01% while NNI converted 0.64% of its revenues into cash flow. This means that, for a given level of sales, NNI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. AGM’s debt-to-equity ratio is 34.42 versus a D/E of 10.77 for NNI. AGM is therefore the more solvent of the two companies, and has lower financial risk.
AGM trades at a forward P/E of 10.87, a P/B of 1.46, and a P/S of 1.99, compared to a forward P/E of 10.26, a P/B of 0.92, and a P/S of 2.51 for NNI. AGM is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AGM is currently priced at a 4.72% to its one-year price target of $62.67. Comparatively, NNI is -6.33% relative to its price target of $49.00. This suggests that NNI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for AGM and 2.00 for NNI, which implies that analysts are more bullish on the outlook for AGM.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. AGM has a beta of 1.20 and NNI’s beta is 1.00. NNI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AGM has a short ratio of 0.04 compared to a short interest of 3.76 for NNI. This implies that the market is currently less bearish on the outlook for AGM.
Nelnet, Inc. (NYSE:NNI) beats Federal Agricultural Mortgage Corporation (NYSE:AGM) on a total of 9 of the 13 factors compared between the two stocks. NNI is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, NNI is the cheaper of the two stocks on an earnings and book value, NNI is more undervalued relative to its price target. Finally, ENVA has better sentiment signals based on short interest.