Is Ellington Financial (EFC) Undervalued As Its P/E Sits In Line With Peers?
Ellington Financial stock moves after recent performance overview
Ellington Financial (EFC) drew fresh attention after recent performance figures highlighted a 1 day gain of 0.9% and modest moves in the past week, set against mixed returns over the past year.
The recent 1 day share price return of 0.90% comes after a softer patch, with the share price slightly down over the past month and year to date. Ellington Financial’s 1 year total shareholder return of 10.66% and 3 year total shareholder return of 47.28% point to momentum that has been building over a longer horizon and shaped more by income than short term price moves.
Compare Ellington Financial’s mix of income and price moves with a curated group of resilient income payers using the 11 dividend fortresses as a starting universe.
Ellington Financial now trades below both its own estimated value and the average analyst target, even after the recent uptick. Is that a cautious market correctly pricing risk, or a discount that has moved too far?
Preferred P/E of 8.9x for Ellington Financial: Is it justified?
On the latest figures, Ellington Financial is trading on a P/E of 8.9x, which sits in line with the wider US Mortgage REITs industry average of 8.9x. At the same time, the stock carries a 54.4% discount to the SWS estimate of its fair value based on future cash flows.
The P/E ratio links the current share price to earnings per share and helps you see what the market is paying for each dollar of Ellington Financial’s profits. For a mortgage focused REIT that reports both investment portfolio income and Longbridge originations, this can offer a quick sense of how the market is weighing earnings power against risks in the funding model and payout profile.
Where things get interesting is in the comparison set. Ellington Financial’s P/E of 8.9x is described as expensive relative to the US Mortgage REITs industry average of 8.9x, yet also good value when compared with both its estimated fair P/E of 10.4x and a much higher peer average of 49.4x. The fair P/E points to a level the market could potentially move toward if current earnings quality and growth rates remain consistent with expectations, while the peer comparison underlines how compressed the multiple is against a broader group of companies.
The current P/E sits exactly on the industry average, which suggests the market is applying a standard earnings multiple to Ellington Financial despite company specific traits such as 71.5% earnings growth in the past year, 19.5% per year earnings growth over five years, and a net profit margin currently at 45% compared with 35.7% last year. Against the estimated fair P/E of 10.4x, that same 8.9x multiple screens as cheaper than the level implied by the regression based fair ratio model, which assumes the P/E could shift closer to that higher figure if fundamentals track the inputs used in the fair value calculation.
Explore the SWS fair ratio for Ellington Financial.
Result: Price-to-earnings of 8.9x (UNDERVALUED)
However, Ellington Financial still faces risks if funding conditions tighten or if credit performance in its mortgage and consumer portfolios turns weaker than expected.
Find out about the key risks to this Ellington Financial narrative.
Another view on Ellington Financial’s value
The P/E discussion points to Ellington Financial looking cheaper than its fair ratio suggests. The SWS DCF model goes much further, with an estimated future cash flow value of $29.55 per share compared with the current $13.47 price. That is a wide gap. Is the market mispricing long term cash generation, or are the model assumptions too optimistic?
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 47 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 Ellington Financial showing both potential and open questions, it makes sense to move quickly, test the numbers yourself, and weigh the trade off between risks and rewards in context by reviewing the 3 key rewards and 4 important warning signs.
Looking for more investment ideas beyond Ellington Financial?
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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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