Acquisition Of Palisades Group Will Expand Fee-Based Services, Diversify Income Streams, And Improve Efficiency

Key Takeaways

• Acquisition and diversification efforts aim to boost revenue, stabilize earnings, and enhance liquidity through new income streams and improved margins.
  
• Investment in technology and advisory services is poised to drive organic growth and capitalize on external opportunities, bolstering earnings growth.
  
• Uncertain interest rates and high housing costs threaten Chimera's revenue, book value stability, and could introduce liquidity and margin volatility.

Catalysts

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

• The acquisition of Palisades Group positions Chimera to provide third-party investment management and advisory services, presenting a new fee-based source of income, which could boost future revenue.
  
• The company intends to diversify its portfolio by increasing its allocation to Agency RMBS, which is expected to provide more stable dividends and enhance liquidity, potentially stabilizing future earnings.
  
• Plans to acquire mortgage servicing rights are seen as a strategy to generate diverse income streams and serve as a natural hedge for the loan portfolio, which may improve net margins.
  
• By utilizing the scaled infrastructure and advanced data management capabilities from its acquisition, Chimera plans to enhance asset-level outcomes and operational efficiencies, potentially increasing net margins.
  
• The intention to invest in technology and expand nondiscretionary investment management and advisory services is expected to drive organic growth and external opportunities, positively impacting earnings growth.

Chimera Investment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chimera Investment's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.5% today to 52.9% in 3 years time.
• Analysts expect earnings to reach $164.2 million (and earnings per share of $1.56) by about March 2028, up from $90.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, down from 12.2x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Chimera Investment Future Earnings Per Share Growth

Risks

• The uncertain interest rate environment, with rising long-term rates despite Fed cuts, could negatively impact Chimera's revenue from interest-earning assets and introduce volatility in net interest margins.
  
• Persistently high interest rates and affordability issues in the housing market have led to a decline in home sales, which might result in reduced revenue and profit from mortgage securities.
  
• The rising book value volatility due to changes in interest rates and credit spreads can affect capital returns and impact future earnings per share.
  
• The company's strategic reliance on nonrecourse securitization financing, while isolating credit risk, may introduce book value volatility and impact net margins if not properly hedged or managed.
  
• Margin calls, although currently deemed immaterial, could heighten liquidity risks, affecting financial stability and Chimera's capacity to leverage its retained securities effectively.

Valuation

• The analysts have a consensus price target of $15.75 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 2028, revenues will be $310.2 million, earnings will come to $164.2 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 11.4%.
• Given the current share price of $13.67, the analyst price target of $15.75 is 13.2% higher.
• 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.