Thursday August 30, 2012
by Benjamin Shepherd, contributing editor Investing Daily
The real estate sector is finally showing signs of life. While real estate is still a high-risk play, the current market environment offers attractive entry points for more conservative property plays that are “off the beaten path”.
Here's a look at Ellie Mae (ELLI), which operates one of the largest electronic mortgage origination networks in the US, and Federal Agricultural Mortgage Corp. (AGM), otherwise known as Farmer Mac.
Ellie Mae provides software to the residential mortgage industry that’s geared to simplify processes.
The company's Encompass platform performs a variety of functions from document and compliance management to income verification. Currently about 59,000 industry professionals are part of the Ellie Mae network.
Although customers have the option to license the entire platform, that can be an expensive proposition. Thus, it recently began offering Encompass on a “Software as a Service” (SaaS) basis, whereby the software is provided to users via the Internet.
The flexibility provided by SaaS has enabled the company to make significant headway with smaller operations over the past couple years, boosting Encompass to nearly 30,000 users, while actually increasing revenue per user by 77 percent.
SaaS revenue increased 137 percent year over year to $8.4 million, or 40 percent of total company revenue.
Since going public in 2008, the company’s earnings per share have accelerated substantially, growing from just 5 cents in 2010 to 24 cents last year. EPS is forecasted to reach 44 cents this year and 62 cents next year.
Although a fairly young company, Ellie Mae already has almost $30 million in cash on its balance sheet with solid cash flows and no debt whatsoever.
The company’s brisk growth should continue, as the real estate market improves and documentation and compliance requirements become increasingly onerous.
Similar to Fannie Mae and Freddie Mac, the Federal Agricultural Mortgage Corp. provides ensures that reasonably priced financing is available to America’s farmers and rural communities, as well as to rural utility companies.
While Fannie Mae and Freddie Mac continue to struggle, Farmer Mac has made a strong recovery over the past few years. In the first quarter of 2012, EPS surged by 18.6 percent over the prior year, rising to $2.04 as net interest income jumped by almost a third.
Asset quality improvement has been largely driven by elevated agricultural commodity prices—corn and wheat are currently trading near post-recession highs—and improving farmland valuations.
The stock is currently trading at just half its book value per share and just 7.2 times its forward 2012 earnings. As of the first quarter, it had $975 million in cash despite a market cap of only $272 million.
In addition to its attractive valuation, Farmer Mac also pays a 10- cent quarterly dividend. With a payout ratio of just 15.2 percent and plenty of cash on the books, the company is likely to raise its payout in the coming quarters.
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