I'm grateful you replied to this first, DaJester; one, because you always hit on the salient points, and two, because you use good financial sense in your posts. It is clear you were only responding to Rick's question, giving him context on how that "trillion" could be arrived at, to wit, nothing in this post is meant to in any way question, contradict, argue, or in any way debate your common sense approach to answering Rick. It mainly provides a good starting point for me to express some ideas meant to address the general questions and comments about valuation this board is "debating," and I very loosely use that word here.
First, since the board administration does not see fit to allow me more than one post, the board must forgive the length of my posts - it's the only way to somewhat mitigate the myriad attacks or questions that ensue after giving any opinion on this board, or any social media in general. So here it goes.
It escapes me how anyone thinks they can predict any value be it the "IPO" (re-IPO) value (stock price), even more so a long-term value when we have absolutely no idea how many shares there will be when the "IPO" is offered, or any terms or set as to what the government will do with its senior preferred position or the warrants. All the predictions are completely meaningless at this point and have NO credibility - fun and games and dreams (I'm doing all these as well) all aside.
The financial reasons one invests in a stock are basically only twofold: price appreciation and dividends (cash flows), but neither exist in a vacuum. Neither can be even ball-parked without knowing how many hands will be in the pot (share count). Furthermore, without the actual financial statements most analysis is usually just generalized use of annualized earnings; reliability, quality, and expected growth of those earnings; a known share count, some reasonable p/e ratio, and a back of the envelope calculation. NONE OF THIS IS MEANT TO BE EXACT but a starting point for how we might see potential future values.
Fannie's 2024 net earnings was $17 billion with 1.158 billion shares (undiluted). I've seen recently the current real-time (average) S&P p/e ratio is around 25 to 29. Some p/e ratios are A LOT higher. But picking a nice round even number well use 30. 2024 EPS would be $14.68 ($17B/1.158B shares) and with a p/e ratio of 30, all other things being equal the market could support a price of $440 per share ($14.68 x 30). This is NOT an IPO price, but a normal market, normal economic activity; no company, accounting, or government shenanigans kind of supportable price - albeit back of the envelope calculation.
A word on p/e ratios: if you google highest p/e ratio stocks you will see a handful of stocks with p/e ratios in the THOUSANDS! And easily more than a hundred stocks with p/e ratios well-above 100. The point here is p/e ratios vary greatly and the highest ones are usually associated with companies that are expected to have exploding earnings in the future (which is covered by a great variety of reasons), but in any case, earnings that will support the high stock price. Set those aside for now.
Investors (Wall Street, Institutional, etc.) WILL pay higher prices (thus an elevated p/e ratio) for quality, dependable earnings; companies with large market share; companies with large retained earnings, solid balance sheet, and large free-cash flows; and finally, companies that will support a large, dependable dividend. Fannie Mae fits ALL of these criteria.
Additionally, companies are generally compared to (valued against) those in its industry classification, although this is only for illustration purposes now. Mastercard: current share price: $591 and change; 2024 net earnings: $12.9B (only 75% of Fannie's 2024 earnings); current dividend: 75 cents per quarter; current outstanding share: roughly 920 million; p/e ratio averaging around 40. Given the size of Fannie's net earnings, their earnings quality, market share, potential elevated dividend, and many other factors it wouldn't surprise me if Fannie could support a 45 or 50 p/e ratio - really it's the market that decides this based on those factors.
Dreaming a little, using prior year net earnings, current share count, and a quality stock-investment hungry market 50 p/e ratio an intermediate to longer-term stock price would have potentially been $735 ($14.68 EPS 2024 * 50 p/e ratio). BUT, we all know by the very fact that there is a share offering coming up that Fannie's share count WILL BE diluted. We have ZERO details or even if its reasonable or a waste of time to value the companies separately or even use their current share counts as a starting point, BUT it is all we have for now.
Finally, the point of all this is that in order for the government to maximize what it takes away from this deal they must provide answers to the open questions in the analysis above because that is exactly what potential IPO buyers will need in order to have any idea what to offer for those shares. In order to do future potential earnings per share anlaysis, discounted cash flow analysis (future potential dividends), etc. the IPO investors will have to see some kind of cap on the amount of dilution. In order to do an IPO now, without giving away the farm on the first pop, the government may not give specify ALL the EXACT share count details, but they could go a long way in assuring IPO investors by eliminating the most problematic and unknown part (unknown because unspecified, worst case is easy to see) - the warrants.
I do NOT think the government fears new lawsuits, BUT they CERTAINLY DO NOT WANT more lawsuits. Voiding or selling the warrants back to FnF kills three birds with one stone - no warrant related lawsuits, reduces new investor hesitancy, and maximizes both IPO and future share prices - the government WILL have to sell more shares in the future to get its max value. It is in the best interest of the government to cap the amount of total shares to at least some reliably calculable number: warrant elimination goes the furthest in doing so.
Finally, all that mess being said if the government doubled Fannie's share count (NOT an endorsement; I hope they do less) that's 2.316B total shares. Using 2024 net earnings of $17B, 2.316B shares, and a p/e ratio of 50 we get: ($17B/2.316B) * 50 = $367 per share for Fannie.
The same calc for Mastercard as example shows the Fannie calc is reasonable:
Mastercard: 2024 net earnings: $12.9B, share count: 920 million (.920B), current p/e ratio of 40 = ($12.9B/.920B) x 40 = $560.86 share price. Mastercard's current actual share price is $591 and change.
The way I see it, Fannie should be viewed as a more premier company than Mastercard. Thus, if someone were aiming in that direction (share price that is) and with a more premier quality earnings company demanding a higher p/e ratio (say 50), in order to back into a similar price $590 per share (or $600 rounded), we could back into the new share count or additional shares: eps $12 x 50 = $600 share price. In order for Fannie to have $12 based on the 2024 earnings figure of $17B a little quick algebra shows they could only sell an additional 260 million shares (rounded).
Calc: ($17B/1.418B shares) x 50 = $600 (rounded); that means only diluting Fannie by an additional 260 million shares (1.418B total new shares - 1.158B current shares). If the government sold those at an average of $200 / share they would only make $52B from the Fannie portion of the deal. If they did something similar with Freddie, ball parking only pulling in $48 B, I don't think $100 B total would do the trick, unless they claimed to the American people that the $110 billion overpayment so far was part of the deal.
A lot of these parameters could be jiggered to get many different values and outcomes; these were done for Fannie alone, they are back of the envelope calcs, but supported by the same calc for an existing company, Mastercard, BUT in the end it all depends on how the government ends up valuing their liquidation preference that's left (in essence how much they want to get out of the deal), and how they treat the overpayments, current retained earnings, and the new required Tier 1 capital percentage.
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