Capstead Mortgage Corporation Valuation – Initial Coverage $CMO
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Capstead Mortgage Corporation (CMO) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Capstead Mortgage Corporation is a self-managed real estate investment trust (REIT). The Company invests in a leveraged portfolio of residential mortgage pass-through securities consisting exclusively of short-duration adjustable-rate mortgage (ARM) securities issued and guaranteed by government-sponsored enterprises (GSEs), either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) (together, the GSEs), or by an agency of the federal Government, the Government National Mortgage Association (Ginnie Mae). The Company finances its residential mortgage investments primarily by borrowing under repurchase arrangements with commercial banks and other financial institutions supported by its long-term investment capital. The repurchase arrangements entered into by the Company involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of CMO – January 2017
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass all 6 of the following tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $1,038,754,144 | Fail | |
| 2. Earnings Stability | Positive EPS for 10 years prior | Pass | ||
| 3. Dividend Record | Dividend Payments for 10 years prior | Pass | ||
| 4. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | -19.58% | Fail | |
| 5. Moderate PEmg Ratio | PEmg < 20 | 10.74 | Pass | |
| 6. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 0.81 | Pass | |
| Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor. | ||||
| 1. Earnings Stability | Positive EPS for 5 years prior | Pass | ||
| 2. Dividend Record | Currently Pays Dividend | Pass | ||
| 3. Earnings Growth | EPSmg greater than 5 years ago | Fail | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $1.00 |
| MG Growth Estimate | -4.25% |
| MG Value | $0.00 |
| Opinion | Overvalued |
| MG Grade | B- |
| MG Value based on 3% Growth | $14.43 |
| MG Value based on 0% Growth | $8.46 |
| Market Implied Growth Rate | 1.12% |
| Current Price | $10.69 |
| % of Intrinsic Value | N/A |
Capstead Mortgage Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings growth over the last ten years. The Enterprising Investor has concerns regarding the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.62 in 2012 to an estimated $1 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 1.12% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Capstead Mortgage Corporation revealed the company was trading below its Graham Number of $13.64. The company pays a dividend of $0.98 per share, for a yield of 9.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 10.74, which was below the industry average of 21.33, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Capstead Mortgage Corporation performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
| Graham Number | $13.64 |
| PEmg | 10.74 |
| PB Ratio | 0.81 |
| Dividend Yield | 9.17% |
| TTM Dividend | $0.98 |
| Number of Consecutive Years of Dividend Growth | 0 |
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Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 9/1/2016 |
| Long-Term Debt & Capital Lease Obligation | $12,529,904,000 |
| Total Assets | $13,905,814,000 |
| Intangible Assets | $0 |
| Total Liabilities | $12,635,704,000 |
| Shares Outstanding (Diluted Average) | 95,866,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $0.74 |
| Dec2015 | $0.97 |
| Dec2014 | $1.33 |
| Dec2013 | $0.93 |
| Dec2012 | $1.50 |
| Dec2011 | $1.75 |
| Dec2010 | $1.52 |
| Dec2009 | $1.66 |
| Dec2008 | $1.93 |
| Dec2007 | $0.19 |
| Dec2006 | -$0.87 |
| Dec2005 | $1.96 |
| Dec2004 | $1.33 |
| Dec2003 | $2.60 |
| Dec2002 | $4.85 |
| Dec2001 | $5.68 |
| Dec2000 | -$6.59 |
| Dec1999 | $2.42 |
| Dec1998 | -$16.88 |
| Dec1997 | $9.40 |
| Dec1996 | $8.28 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $1.00 |
| Dec2015 | $1.18 |
| Dec2014 | $1.33 |
| Dec2013 | $1.37 |
| Dec2012 | $1.62 |
| Dec2011 | $1.59 |
| Dec2010 | $1.30 |
| Dec2009 | $1.12 |
| Dec2008 | $0.87 |
| Dec2007 | $0.57 |
| Dec2006 | $1.17 |
| Dec2005 | $2.55 |
| Dec2004 | $2.42 |
| Dec2003 | $2.58 |
| Dec2002 | $1.01 |
| Dec2001 | -$1.00 |
| Dec2000 | -$3.12 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
