REIT Stocks

Capstead Mortgage Corp Valuation – July 2018 $CMO

Company Profile (excerpt from Reuters): Capstead Mortgage Corporation, incorporated on April 15, 1985, operates as a self-managed real estate investment trust (REIT). The Company manages a leveraged portfolio of residential mortgage pass-through securities consisting of relatively short-duration adjustable-rate mortgage (ARM) securities issued and guaranteed by government-sponsored enterprises, either Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), or by an agency of the federal government, the Government National Mortgage Association (Ginnie Mae).

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CMO – July 2018

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 $778,439,067 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 -63.89% Fail
5. Moderate PEmg Ratio PEmg < 20 12.41 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.66 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 $0.67
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $9.78
MG Value based on 0% Growth $5.73
Market Implied Growth Rate 1.95%
Current Price $8.37
% of Intrinsic Value N/A

CAPSTEAD Mtg Co/SH 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 $1.33 in 2014 to an estimated $0.67 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 1.95% 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 Mtg Co/SH revealed the company was trading below its Graham Number of $9.99. The company pays a dividend of $0.8 per share, for a yield of 9.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 12.41, which was below the industry average of 49.54, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

CAPSTEAD Mtg Co/SH receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Graham Number $9.99
PEmg 12.41
PB Ratio 0.66
Dividend Yield 9.56%
TTM Dividend $0.80
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Long-Term Debt & Capital Lease Obligation $12,035,110,000
Total Assets $13,256,355,000
Intangible Assets $0
Total Liabilities $12,087,499,000
Shares Outstanding (Diluted Average) 92,121,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $0.43
Dec2017 $0.65
Dec2016 $0.70
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.67
Dec2017 $0.84
Dec2016 $0.98
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

Recommended Reading:

Other ModernGraham posts about the company

Capstead Mortgage Corporation Valuation – Initial Coverage $CMO

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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.

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