B.Riley initiates Fannie Mae stock coverage with Neutral rating, $10 target

B.Riley initiated Neutral coverage on Fannie Mae (FNMA) with a $10.00 price target, noting its significant 276% YTD gain but also its current trading above fair value and persistent profitability challenges under conservatorship. The firm identifies two potential paths for FNMA's future: a highly dilutive recapitalization or the forgiveness of the Treasury's $121 billion senior preferred position, with recent Treasury comments suggesting the latter, less dilutive scenario for equity holders, and a high likelihood of the $19 billion junior preferreds being made whole. Concurrently, Fannie Mae is marketing a $560.5 million sale of reperforming loans and has revised its 2025 single-family home sales forecast downward to 4.14 million units, attributing the adjustment to updated expectations for higher interest rates, projected at 6.5% by year-end 2025.

Analysis

B.Riley has initiated coverage on Fannie Mae (FNMA) with a Neutral rating and a $10.00 price target, a figure notably below its current trading price of $12.36. This cautious stance comes despite a remarkable 276% year-to-date return, as the stock is considered to be trading above its fair value with a high beta of 2.07, indicating significant volatility. The core of the investment thesis hinges on the resolution of its government conservatorship, in place since 2008. B.Riley outlines two potential outcomes: a highly dilutive recapitalization or a more favorable forgiveness of the U.S. Treasury's $121 billion senior preferred position. The firm suggests recent commentary from the Treasury Secretary points toward the latter, less dilutive scenario for common equity holders. Furthermore, the analysis indicates a high probability that the $19 billion in junior preferred shares will be made whole. Concurrent with this strategic uncertainty, Fannie Mae is actively managing its portfolio by marketing a $560.5 million sale of reperforming loans. However, the company has also revised its 2025 forecast for single-family home sales downward to 4.14 million units, citing expectations for higher interest rates of 6.5% by the end of 2025, which presents a headwind to its fundamental business operations.

Key Decisions for Investors

• Given the stock has risen 276% year-to-date and the new price target is below the current price, investors should recognize the significant valuation risk and the speculative nature of the investment, which is heavily dependent on a favorable government action.
• The primary catalyst for FNMA's equity value is the method of its exit from conservatorship, so investors should closely monitor communications from the U.S. Treasury regarding the treatment of its $121 billion senior preferred stake.
• Consider the macroeconomic headwinds, as Fannie Mae's own downward revision of its 2025 home sales forecast due to higher anticipated interest rates may negatively impact fundamental performance, regardless of the conservatorship outcome.
• For investors seeking a potentially different risk-reward profile, the junior preferred shares may be worth investigating, as B.Riley suggests a good chance this $19 billion tranche will be made whole in a resolution.