Critical Acquisitions And Mortgage Market Expansion To Boost Revenue And Strengthen Diversification

Key Takeaways

• Chimera's acquisition of Palisades Group is expected to diversify revenue and improve operational efficiencies, enhancing earnings through expanded fee-based income.
  
• Focus on distressed residential loan assets and new financing initiatives can enhance earnings by leveraging lower cost capital in a favorable rate environment.
  
• Economic fluctuations and market conditions challenge Chimera's earnings potential due to reliance on complex instruments, acquisitions, and mortgage-related strategies.

Catalysts

Operates as a real estate investment trust (REIT) in the United States.

• A steeper yield curve arising from Federal Reserve rate cuts can potentially reduce funding costs and enhance Chimera's future operating performance by increasing net interest margin. This steepening should benefit revenue and net margins as it makes their borrowing cheaper while maintaining or even increasing returns on assets.
  
• Chimera's recent acquisition of Palisades Group brings additional fee-based income from asset management, anticipated to complement their existing business. This is expected to grow earnings through increased diversification of revenue streams, taking advantage of Palisades' capabilities in portfolio and credit risk management, which should improve operational efficiencies.
  
• Strong investor demand in the mortgage credit securities market, evidenced by a projected 40% increase in Non-Agency RMBS issuances for 2024 compared to 2023, indicates an opportunity for Chimera to drive revenue growth by expanding their investments in this area at attractive credit spreads.
  
• New securitizations, like CIM 2024-R1, and the issuance of unsecured notes help diversifying financing sources and securing lower cost capital, which can enhance earnings by leveraging investments in residential loans that yield mid-teen returns.
  
• The strategic focus on purchasing distressed and transitional residential loan assets, which are currently expected to yield mid
• to high-teen returns, provides Chimera an opportunity to increase revenu while taking advantage of potentially undervalued market sectors during a favorable rate environment.

Chimera Investment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chimera Investment's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 45.9% today to 40.8% in 3 years time.
• Analysts expect earnings to reach $134.1 million (and earnings per share of $1.9) by about November 2027, down from $140.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2027 earnings, up from 8.5x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 4.35% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Chimera Investment Future Earnings Per Share Growth

Risks

• Changes in interest rates and economic conditions can significantly impact Chimera's net margins and earnings, as rising rates could affect borrowing costs and asset returns, while a steeper yield curve environment may not materialize as anticipated.
  
• Chimera’s reliance on complex financial instruments like securitizations and non-agency RMBS involves execution risk, potentially affecting earnings if market conditions change or if these instruments do not perform as expected.
  
• The acquisition of Palisades Group, while viewed positively, introduces integration risk and uncertainty regarding the successful realization of expected accretive benefits, which could impact Chimera's future revenue and earnings.
  
• The market's economic return expectations based on GAAP measures exceeding non-GAAP earnings suggest potential fluctuations in perceived performance, possibly affecting net margins if underlying asset values decline or do not appreciate as expected.
  
• Fluctuations in the housing market, including changes in home prices or rising delinquencies, could adversely affect Chimera's mortgage credit assets and securitization strategies, impacting future revenue and earnings.

Valuation

• The analysts have a consensus price target of $16.25 for Chimera Investment based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $328.3 million, earnings will come to $134.1 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $14.94, the analyst's price target of $16.25 is 8.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.