Average earnings vs. trend of earnings. An AGNC example.

Which is more important - 1) the average earnings of a period of years or 2) the trend of earnings over those same years?  The answer is not clear cut.  AGNC, the stock I have been analyzing lately, has only been in business since 2008.  It hasn't been around long enough to even create a trend with three yearly data points.

 

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American Capital Agency Corporation earned the following per share in recent years:

 

2008 = $2.36

2009 = $6.78

2010 = at least $6.28 (my estimate)

 

AGNC earned $5.05 in the first three quarters of 2010.  I think it is safe to say that AGNC will earn at least $6.28 per share in 2010.  That is the total of the first three quarters ($5.05) plus a repeat performance of their worst quarter of the year ($1.23).  It will earn $6.73 if it can simply earn the average of the first three quarters ($1.68) in the fourth quarter of 2010.

 

Here are AGNC's most recent quarterly earnings from their SEC filings:

1Q2010 = $2.13

2Q2010 = $1.23

3Q2010 = $1.69

4Q2010 = $1.68 (my estimate based on a simple average of the first three quarters of 2010)

 

Its annual earnings trend appears to be flattening.  If AGNC's earnings stagnates at around $6.00, then the maximum of the stock price could reach and still qualify at a conservative investment according to the late-great Benjamin Graham is $120.00/share ($6.00 earnings time a 20 P/E multiple = $120).  AGNC is currently trading at around $28.74 per share.  That would equate to a multiple of 4.5 times earnings.  That is a very low multiple even for REITs which are averaging around a 8.5 multiple right now. 

 

Let's assume for a moment that AGNC earns $6.28 in 2010.  In that case the three year earnings average would be $5.14.  Place a twenty multiple on top of the $5.14 figure an you get a maximum value of $102.80 per share.

 

AGNC's earnings are a function of their portfolio size and their interest rate spread.  Their earnings won't stagnate unless one or both of those change their trends.

 

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