Recent commentary on Ellington Financial (EFC) focuses on how its hedging, diversified portfolio, financing sources, and relatively low leverage are helping it manage mortgage market volatility and ongoing loan origination activity.
See our latest analysis for Ellington Financial.
At a share price of US$11.55, Ellington Financial has seen a 2.21% 7 day share price gain, but its 30 day and year to date share price returns of 7.75% and 15.57% declines suggest momentum has cooled, even as the 3 year total shareholder return of 37.52% and 5 year total shareholder return of 29.46% point to a stronger longer term record.
If you are weighing income focused REITs against other ideas, it can help to broaden your search and review 20 top founder-led companies
With shares at US$11.55 compared with an estimated book value of US$13.47 and an indicated intrinsic discount of about 50%, the key question is whether EFC is genuinely undervalued or if the market is already pricing in its future growth.
Price to earnings of 12.1x: Is it justified?
Ellington Financial’s P/E of 12.1x, based on a last close of $11.55, sits above both its Mortgage REIT peers and the wider US Mortgage REITs industry, which points to a richer valuation than many direct comparables.
The P/E ratio tells you how much you are paying for each dollar of earnings, which matters a lot for income focused vehicles like mortgage focused REITs. A higher P/E can suggest the market is paying up for expected growth in earnings or sees the earnings stream as relatively resilient.
Here, there is a split signal. On one side, EFC trades above the US Mortgage REITs industry average P/E of 9.1x and the peer average of 9.7x, which indicates a premium. On the other side, the estimated fair P/E for EFC is 13.2x, slightly above the current 12.1x, and the SWS DCF model’s fair value of $23.19 versus the $11.55 share price frames the stock as trading at a material discount to that cash flow based view.
That means the market price is richer than many peers when judged purely on earnings multiples, yet still below both the fair P/E level that the regression based fair ratio points to and the DCF estimate of future cash flows.
Explore the SWS fair ratio for Ellington Financial
Result: Price-to-earnings of 12.1x (UNDERVALUED)
However, you still need to weigh risks such as exposure to mortgage and consumer credit cycles, as well as the volatility that can come with leveraged fixed income portfolios.
Find out about the key risks to this Ellington Financial narrative.
Another View on Value
While the P/E discussion leans toward EFC looking cheap versus its fair ratio, the SWS DCF model takes a different angle and assigns a fair value of $23.19 per share, compared with the current $11.55 price. If cash flows point higher, what might the market be missing?
Look into how the SWS DCF model arrives at its fair value.
Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Ellington Financial for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 61 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.
Next Steps
With sentiment clearly mixed, with both risks and rewards in focus, it helps to move fast, review the data yourself, and weigh the 4 key rewards and 4 important warning signs.
Looking for more investment ideas?
If EFC is on your radar, do not stop there. Giving yourself a broader watchlist now can help you react with confidence when opportunities appear.
- Target resilient income potential by reviewing higher yielding names in the 12 dividend fortresses that still pass core fundamental checks.
- Spot potential mispricings by scanning the 61 high quality undervalued stocks where stronger balance sheets and cash flows may not yet be fully reflected in prices.
- Protect your downside focus by checking the 67 resilient stocks with low risk scores which highlights companies with lower overall risk scores.
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.
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