Leverage Reduction And WMC Acquisition May Strengthen Future Prospects, But Market Volatility Could Impact Profitability

Key Takeaways

• Strategic securitization and resource backing have strengthened MITT’s capital position, improving earnings growth and creating competitive advantages for future margin improvements.
  
• The WMC acquisition and home equity loan investments signify scalable growth, with expected synergies and profits boosting future revenues and shareholder returns.
  
• Market volatility, financial leverage challenges, and dependence on external resources pose risks to AG Mortgage Investment Trust's profitability and operational financing capabilities.

Catalysts

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

• AG Mortgage Investment Trust's disciplined securitization strategy has reduced economic leverage from 2.7 to 1.4 turns since the CEO’s tenure began and is expected to continue generating additional capital for reinvestment, positively impacting earnings growth.
  
• The acquisition of WMC, increasing MITT’s market cap by over 45%, showcases scalable growth potential, enhancing future revenue due to integration synergies and increased stockholder returns.
  
• The support from TPG Angelo Gordon provides MITT with substantial resources, enhancing access to capital and creating a competitive edge in sourcing and operational leverage, which will likely improve net margins.
  
• Investments in home equity loans have demonstrated significant profitability and are anticipated to contribute positively to future earnings and revenue growth as MITT leverages early entry advantages in this nascent market.
  
• Arc Home, a 45% owned subsidiary, is expected to transition to profitability, having invested in new leadership and operational efficiencies, thereby enhancing MITT’s earnings available for distribution and contributing positively to net margins.

AG Mortgage Investment Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AG Mortgage Investment Trust's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.6% today to 33.6% in 3 years time.
• Analysts expect earnings to reach $29.6 million (and earnings per share of $1.08) by about March 2028, down from $36.4 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 22.2x on those 2028 earnings, up from 6.3x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 0.63% 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.

AG Mortgage Investment Trust Future Earnings Per Share Growth

Risks

• Market volatility and turbulent economic conditions, as noted by the CEO, could impact MITT's ability to protect and grow its book value, ultimately affecting revenues and earnings.
  
• Although MITT's economic leverage ratio has decreased, any changes in the financial markets that tighten credit conditions could restrict its ability to continue financing operations, impacting net margins.
  
• The acquisition of WMC, while initially successful, carries the risk of integration and realization of synergies, which could affect future profitability if not managed well.
  
• The reliance on TPG Angelo Gordon's resources, though beneficial, may present risks if these relations change, potentially affecting MITT's access to capital and impacting financial outcomes such as earnings.
  
• Higher costs from rolling to floating preferred shares could increase financial expenses, reducing net margins unless mitigated through other financial strategies.

Valuation

• The analysts have a consensus price target of $15.875 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 2028, revenues will be $88.3 million, earnings will come to $29.6 million, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 11.4%.
• Given the current share price of $7.74, the analyst price target of $15.88 is 51.2% 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.