Freddie Mac’s Stunning Q2 2025 Earnings Report: A Valuation Discrepancy of Epic Proportions

Confounding Paradox of Prosperity

In a financial landscape often dominated by fleeting headlines and market noise, a quiet titan of the American economy has once again delivered a performance that defies its market valuation. Freddie Mac (OTCQB: FMCC), the government-sponsored enterprise (GSE) that acts as a vital artery for the nation’s mortgage market, has today released its second-quarter 2025 earnings report. The results paint a picture of a robust, resilient, and deeply profitable company—yet its stock price, a mere shadow of its true worth, continues to trade at a staggering discount. With a closing price of just $6.49 on July 31, 2025, and an intrinsic value that a comprehensive analysis places well over ten times that amount, the company stands as a “screaming buy” and perhaps the single most compelling value investment opportunity in the U.S. market today. This article will delve into the newly released numbers, dissect the company’s unassailable competitive advantages, explore the path out of its decade-and-a-half-long conservatorship, and ultimately, seek to understand the monumental disconnect between Freddie Mac’s financial fortitude and its astonishingly low market capitalization.

The headline numbers from the Q2 2025 report are a testament to the company’s operational strength. Net income for the quarter reached a formidable $2.8 billion, a figure that would be cause for celebration at most large financial institutions. While this represents a modest decrease of 13% from the previous quarter’s $3.2 billion and a 14% drop from Q2 2024, the reason behind this decline speaks more to prudent risk management than any fundamental weakness. The primary driver of the dip was a significant increase in the provision for credit losses, which rose to $0.8 billion. This move was not a sign of widespread delinquency, but rather a proactive measure, fueled by revised house price forecasts that anticipate lower market values and a reduced growth trajectory for single-family properties. In a cyclical market, this kind of forward-looking caution demonstrates a management team that is prioritizing long-term stability and credit quality over short-term earnings optics—a hallmark of a well-run enterprise.

Despite the rise in credit provisions, other key metrics underscore the company’s health. Net revenues for the quarter stood strong at $5.4 billion, a mere 1% year-over-year decline. The engine of Freddie Mac’s profitability, its net interest income, actually climbed 3% to $4.9 billion. This growth was driven by a larger portfolio and a continued focus on optimizing funding costs, a key advantage of its GSE status. The only notable softness came from non-interest income, which fell 38% to $0.5 billion, reflecting a challenging environment for its Multifamily segment. The company’s financial efficiency is further highlighted by its trailing 12-month Return on Equity (ROE) of 19.5%. An impressive figure that showcases its ability to generate substantial returns on its capital base within a tightly regulated framework.

The Case for Undervaluation: A Deep Dive into the Models

To truly grasp the magnitude of Freddie Mac’s undervaluation, one must look beyond the quarterly report and apply a rigorous, long-term perspective. The market’s current assessment of Freddie Mac’s worth is a profound misunderstanding, driven by an almost myopic focus on its conservatorship status rather than its undeniable intrinsic value. We have employed two distinct and highly conservative valuation methodologies to pierce through this market fog: the Buffett-Inspired Valuation Method and the McGrew Growth Valuation Method. Both approaches are designed to estimate a company’s true value by projecting its future distributable earnings—a metric for a financial services company like Freddie Mac that is best represented by its Net Income from Continuing Operations.

The core assumptions underpinning both models are intentionally conservative. We project future earnings at an 8% discount rate, which is a reasonable reflection of the current cost of capital, and apply a 2.5% perpetual growth rate beyond Year 10, a figure that is below the historical inflation rate and a safe assumption for a mature enterprise. The Buffett-Inspired method then applies a constant 3% growth rate over the next decade, while the McGrew method, designed for “growth stocks,” uses a more dynamic approach, starting with a 13% 3-5 year Compound Annual Growth Rate (CAGR) and linearly declining to 6% by Year 10. These models, therefore, do not rely on aggressive or optimistic assumptions; they are grounded in financial prudence.

A critical and often overlooked component of this analysis is the correct accounting for the U.S. Treasury’s warrants. These warrants entitle the government to 79.9% ownership on a fully diluted basis at a nominal price, bringing the fully diluted share count to approximately 3.23 billion. It is this correct, fully diluted share count that must be used to calculate a per-share value. The results of this rigorous analysis are nothing short of breathtaking:

These valuations are not just higher than the current stock price; they are in a different universe altogether. The last closing price of $6.49 represents a mere 9% of the Buffett-inspired intrinsic value and a shocking 5% of the McGrew growth valuation. Even after applying a steep 40% margin of safety, a crucial step for a company with political uncertainties, the target prices of $42.91 and $72.46 dwarf the current trading price. The market is not just mispricing Freddie Mac; it is ignoring its fundamental reality.

Unassailable Competitive Advantages: The Bedrock of Freddie Mac’s Business

Freddie Mac’s financial strength is not an accident of good fortune; it is a direct result of a durable and unassailable competitive advantage. The company is not just a participant in the U.S. mortgage market; it is the infrastructure. Its government-backed cost advantage is the cornerstone of its moat. As a GSE, Freddie Mac enjoys an implicit U.S. government guarantee, which allows it to borrow money at significantly lower rates than its private-sector peers. This cost of funds advantage is a perpetual engine of profitability. It allows the company to purchase loans from lenders at more favorable rates, providing liquidity that is unmatched by any private bank. This is not a matter of better management or superior technology; it is a structural advantage that cannot be replicated.

This structural advantage gives rise to a powerful network effect. By providing a consistent, low-cost source of liquidity, Freddie Mac ensures that mortgage lenders across the country can continue to originate new loans, regardless of economic conditions. Lenders, in turn, rely on Freddie Mac’s ability to package these loans into highly-rated securities, which are then sold to investors worldwide. This creates a virtuous cycle where lenders, investors, and homeowners all benefit from Freddie Mac’s central role. This resilient system, which survived and grew even through the 2008 financial crisis while under conservatorship, is an essential cog in the housing finance machine that private players simply cannot replicate at scale.

Freddie Mac’s business model is also a marvel of capital efficiency. Its core operation—purchasing and securitizing mortgages—is not capital-intensive in the way a traditional manufacturing business is. This is reflected in its high free cash flow yield of 173% and its negligible capital expenditures, which are literally 0% of its free cash flow. This means that nearly every dollar of operating cash flow is available to be retained for capital building or, once out of conservatorship, to be distributed to shareholders. This low capital-intensive nature, combined with a robust and growing mortgage portfolio (which expanded to $3,227 billion in Q2 2025, up from $3,183 billion a year ago), demonstrates a business that is built for both growth and profitability.

The Conservatorship Conundrum and the Bill Ackman Thesis

So, if Freddie Mac is so fundamentally strong and demonstrably undervalued, why does the market remain so hesitant? The answer lies in the Gordian knot of its ongoing government conservatorship, a status that has persisted since the 2008 financial crisis. For many investors, this political overhang is an insurmountable risk, a “Sword of Damocles” that could cut off all potential returns. Yet, for patient and sophisticated investors, this is precisely where the opportunity lies.

No one has been a more vocal or persistent advocate for Freddie Mac’s liberation than Bill Ackman, the founder of Pershing Square Capital Management. Ackman, a long-term investor in both Freddie Mac and Fannie Mae, sees a “large asymmetric upside” in the companies’ return to private ownership. He has argued for years that the companies have paid back far more to the government than they ever received in the bailout and have, in the process, built a significant capital cushion, making them financially sound. His thesis is simple yet powerful: ending the conservatorship would not only allow the companies to operate more efficiently but would also ultimately benefit the housing finance system and, perhaps most importantly, generate a final, substantial profit for the U.S. Treasury.

Ackman has a clear vision for Freddie Mac’s future. He has projected an initial public offering (IPO) in late 2026, with a potential share price of around $31, and a further valuation climb to $34 per share by 2028. While these figures are a fraction of the intrinsic values calculated by our models, they still represent a potential return of over 400% from the current share price. Ackman’s thesis is not without its caveats, however, and he has been careful to warn that the outcome is uncertain and that investors should only risk capital they can afford to lose. This cautionary note is a necessary reminder that while the fundamental value is extraordinary, the timing and path to its realization are subject to political will and regulatory action.

The AIG Roadmap: A Plausible Path to Private Ownership

The path out of conservatorship for Freddie Mac is not an unprecedented leap into the dark; a clear and successful precedent exists in the form of American International Group (AIG), which also underwent a government-led rescue and eventual return to private ownership. AIG’s story provides a powerful roadmap for how Freddie Mac could be liberated, proving that a government exit can be methodical, strategic, and ultimately profitable for taxpayers.

AIG’s exit was a multi-year, phased process. The government, as the primary rescuer, initially took a controlling equity stake. Over time, as AIG stabilized and began to repay its loans, the government shifted its focus to recouping its investment. The key to this successful exit was the U.S. Treasury’s patient and opportunistic sale of its common stock. After converting its preferred stock into common shares, the Treasury began a series of public offerings, selling its stake in tranches. This staggered approach prevented a market crash and allowed the government to maximize its proceeds. The government’s final sale of its remaining shares in late 2012 marked the end of the conservatorship and, notably, resulted in a net positive return for taxpayers.

Freddie Mac could follow a strikingly similar path. The first step, which has already begun, is the company’s continued accumulation of capital to meet new regulatory requirements under the Enterprise Regulatory Capital Framework (ERCF). Next, the government’s senior preferred stock and the warrants would need to be addressed. This would likely involve a conversion of the government’s equity interests into common shares, followed by a large-scale public offering to recapitalize the company and establish a new, private shareholder base. Once sufficiently capitalized and with a clear business plan, the government could then begin to sell its newly converted common stock in a measured, staggered fashion, just as it did with AIG. The warrants, which represent the government’s ultimate claim to a majority of the company, could be either sold to investors or exercised and sold as part of these public offerings, ensuring full compensation for the taxpayers who supported the company during the crisis. This roadmap transforms the conservatorship from an intractable problem into a solvable, time-bound process with a clear historical precedent.

Management’s Vision and Financial Fortitude

Beyond the political and financial machinations of conservatorship, Freddie Mac’s day-to-day operations are a testament to its fundamental health. The company’s management, led by CEO Michael DeVito, has been steadfast in its commitment to building capital and serving the U.S. housing market. The Q2 2025 earnings call highlighted a focus on continued support for housing affordability, with new business activity in the Single-Family segment climbing to $95 billion, a 12% increase year-over-year, even as the Multifamily segment experienced a 25% decrease due to broader market conditions. DeVito specifically noted the company’s proactive efforts to mitigate credit risks in a softening housing market, underscoring a disciplined approach to lending.

Financially, Freddie Mac remains exceptionally robust. The company’s TTM net profit margin stands at a staggering 50.9%, and its earnings have grown at a healthy 13% CAGR over both the past three and five years. The debt-to-equity ratio, at 53.3, is typical for a financial institution of its size and leverage, and its interest coverage ratio of 1.2 reflects its ability to sufficiently cover its operational interest income. Notably, the company pays no dividends to its shareholders (payout ratio of 0%), as all earnings are currently being retained to bolster its capital base under the ERCF, a necessary step on the road to exiting conservatorship. The share count remains stable, with no dilution or buyback, reinforcing that the company is in a phase of quiet capital accumulation rather than market manipulation.

The Market’s Blind Spot and the Opportunity It Creates

The contrast between Freddie Mac’s current market capitalization of approximately $4.22 billion and the massive intrinsic value calculated by our models is the central theme of this analysis. This vast gap is not a reflection of the company’s financial health, but rather a symptom of market skepticism and a fundamental lack of understanding. The market is not yet pricing in the inevitable end of conservatorship, the enormous future earnings power of the enterprise, or the unassailable moat that protects its business.

This is a classic case of what legendary investor Benjamin Graham called “the market’s voting machine,” where short-term fears and headlines drown out the long-term reality of “the weighing machine.” The uncertainty surrounding the conservatorship, the complexity of its structure, and the perceived political risk have created a blind spot that most investors are unwilling to navigate. But for the patient, long-term, and value-oriented investor, this is the very reason the opportunity exists.

Freddie Mac is not a company whose fortunes are tied to the next tech fad or the latest earnings beat. It is a foundational piece of the U.S. economy. Its deep undervaluation is not a sign of weakness, but a sign that the market has yet to fully appreciate the value it is being offered. The Q2 2025 earnings report is simply the latest data point in a long and consistent history of strong financial performance. It serves as another reminder that while the market may be voting based on fear, the underlying weight of Freddie Mac’s value continues to grow heavier and heavier.

In conclusion, Freddie Mac presents a compelling and perhaps unprecedented case for a value-oriented portfolio. The company is fundamentally sound, highly profitable, and protected by a robust competitive moat. The conservatorship, while a source of uncertainty, has a clear historical precedent for a successful exit. With strong Q2 2025 earnings and a valuation that is a fraction of its true worth, Freddie Mac is more than just a stock; it is a potential generational opportunity for investors with the patience to see its full potential unlocked.

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Additional Quantitative Results Table