Focusing On Home Equity Loans Will Strengthen Future Prospects Amid Competitive Risks

Key Takeaways

• Strategic focus on home equity loans and leveraging securitizations is expected to boost earnings and enhance returns.
  
• Prudent liquidity management and reduced leverage position the company well for growth and improved net margins.
  
• Increased competition and conservative leverage strategies may restrict market share, margins, and access to capital, potentially impacting future revenue and earnings growth.

Catalysts

Operates as a residential mortgage real estate investment trust in the United States.

• MITT has identified the rapidly growing home equity loan segment as a significant opportunity, expecting returns on equity (ROEs) in the 20% range, which is likely to positively impact earnings over the coming quarters and years.
  
• The company is reducing leverage and managing liquidity prudently, which positions it well for future growth opportunities and may help improve net margins.
  
• MITT is leveraging its dominant position in agency-eligible investor loan securitizations, with plans to continue issuing new transactions. This could meaningfully enhance revenue through increased securitization activities.
  
• Management's strategic focus on the rotation of capital into higher ROE segments, such as home equity loans, is expected to enhance earnings capacity, potentially bringing earnings per share (EPS) closer to covering the dividend in the future.
  
• Arc Home is trending towards profitability, and management expects this to eventually become a positive contributor to earnings, which would further improve the company's overall financial results.

AG Mortgage Investment Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AG Mortgage Investment Trust's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 72.2% today to 22.1% in 3 years time.
• Analysts expect earnings to reach $20.3 million (and earnings per share of $0.7) by about December 2027, down from $58.3 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 30.7x on those 2027 earnings, up from 3.6x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 10.6x.
• Analysts expect the number of shares outstanding to decline by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

AG Mortgage Investment Trust Future Earnings Per Share Growth

Risks

• The increased competition in the home equity space from other REITs and insurance companies could limit AG Mortgage's market share and margins in future securitizations, potentially impacting revenue.
  
• The assumptions of increased future prepayment speeds on their loan portfolio may be conservative; however, any error in assumption could affect earnings, especially if actual prepayments differ from projections.
  
• The potential infrequency or inefficiency in financing structures such as securitizations for home equity loans might limit capital deployment or affect return on equity in the expected 20% range, impacting earnings.
  
• Rising interest rate environments or macroeconomic volatility could impact borrowing costs and lending spreads, which might suppress net interest margins and affect earnings.
  
• The company's conservative leverage after retiring $86 million of convertible notes could be advantageous, yet may also limit access to additional capital necessary for further growth initiatives, potentially affecting future revenue and margin expansion.

Valuation

• The analysts have a consensus price target of $15.79 for AG Mortgage Investment Trust 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 $52.5, 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 2027, revenues will be $92.1 million, earnings will come to $20.3 million, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 10.9%.
• Given the current share price of $7.13, the analyst's price target of $15.79 is 54.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.