Key Takeaways:
Wedbush downgraded Fannie Mae to Neutral, citing stalled political momentum toward an exit from government conservatorship that has weighed on the stock this year.
"The political momentum towards an IPO or recap & release has arguably stalled, in our view, until after the midterms," Wedbush analysts Michael Piccolo and Henry Coffey wrote in a note Friday.
The downgrade was triggered by valuation, as Fannie Mae's recent price of $8.18 surpassed the analysts' $8 price target. The firm maintained its Outperform rating on fellow mortgage giant Freddie Mac, setting a 12-month price target of $12. Year-to-date, Fannie Mae shares have fallen 23 percent and Freddie Mac shares are down 29 percent.
The lack of a clear timeline for exiting government control remains the primary obstacle for investors, despite the companies building capital. Fannie Mae's net worth now stands at $112.7 billion. Freddie Mac’s net worth increased by 18 percent year-over-year to $73.9 billion, a milestone in its recapitalization, the analysts wrote.
Despite the stalled progress on the political front, Wedbush noted that both Fannie Mae and Freddie Mac are "making favorable progress at improving efficiency and building capital." Freddie Mac's first-quarter pretax income of $4.4 billion beat the analysts' expectation of $3.6 billion. Fannie Mae's $4.66 billion in pretax income fell just short of their $4.8 billion estimate.
In a statement, Federal Housing Finance Agency director Bill Pulte highlighted the company's operational improvements, stating, "Fannie Mae is a far more effective and leaner company than it was a year ago, with solid earnings, lower expenses, and $112.7 billion in net worth." The statement did not provide any update on plans to exit conservatorship.
The downgrade underscores investor frustration with the lack of a clear path forward for the two mortgage finance companies. The continued uncertainty is likely to remain a headwind for the stocks until a concrete plan for their release from government control is announced.
This article is for informational purposes only and does not constitute investment advice.
