Redemption Of Preferred Stock And Focus On Agency RMBS Will Boost Future Earnings

Key Takeaways

• Improved capital structure and increased allocation to Agency RMBS could enhance net margins and boost future revenue and earnings.
  
• Diversified interest rate hedges and potential yield curve normalization may stabilize net interest income and boost overall profitability.
  
• Interest rate volatility and shifting monetary policies threaten agency mortgage demand, impacting Invesco's revenue, earnings, and future profitability.

Catalysts

Operates as a real estate investment trust (REIT) that invests, finances, and manages mortgage-backed securities and other mortgage-related assets in the United States.

• Invesco Mortgage Capital has improved its capital structure by redeeming higher-cost Series B preferred stock and funding it with lower-cost repurchase agreements, which could enhance net margins and future earnings.
  
• The company has increased its allocation to higher coupon Agency RMBS, which stand to benefit from a decline in interest rate volatility and are expected to see improved demand, positively impacting future revenue and earnings.
  
• A potential future normalization of the yield curve and easing of monetary policy could enhance the returns on existing investments in Agency CMBS and Agency RMBS, improving net margins and overall profitability.
  
• The company's strategy to increase the diversification of its interest rate hedges by increasing exposure to U.S. Treasury futures may result in better stability in net interest income, potentially supporting earnings growth.
  
• An eventual increase in demand for Agency CMBS, driven by their prepayment protection and attractive risk-adjusted return profiles, might provide additional revenue streams and enhance the company’s earnings.

Invesco Mortgage Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Invesco Mortgage Capital's revenue will grow by 26.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.8% today to 2.5% in 3 years time.
• Analysts expect earnings to reach $4.1 million (and earnings per share of $1.46) by about March 2028, down from $34.8 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 220.3x on those 2028 earnings, up from 15.6x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% 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.

Invesco Mortgage Capital Future Earnings Per Share Growth

Risks

• The rise in long-term treasury yields and increased inflation expectations may lead to higher interest rates, reducing demand for securities like RMBS and CMBS, which could negatively impact revenue and margins.
  
• Due to elevated interest rate volatility, investor demand for agency mortgages may decline, affecting Invesco Mortgage Capital's net interest income and overall earnings.
  
• The company's earnings available for distribution decreased due to a one-time charge from redeeming Series B preferred stock, which directly impacts distributable net income and shareholder returns.
  
• The cautious stance towards agency mortgages due to potential interest rate volatility and shifting monetary policies highlights risks to future profitability and net margins.
  
• The possibility of future GSE reform, despite being currently considered remote, poses inherent risks to the implied guarantee of agency mortgages, which could affect the valuation and revenue of these assets.

Valuation

• The analysts have a consensus price target of $8.667 for Invesco Mortgage Capital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $162.2 million, earnings will come to $4.1 million, and it would be trading on a PE ratio of 220.3x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $8.79, the analyst price target of $8.67 is 1.4% lower. 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.