Mortgage Servicing Technology And Diversification Will Drive Efficiency

Key Takeaways

• Investments in technology and diversification are reducing costs, improving efficiency, and stabilizing earnings across shifting market cycles.
  
• Housing demand and market liquidity are expected to drive growth in investment opportunities and support stronger, more resilient revenue streams.
  
• Multiple external pressures-ranging from housing market dynamics and funding vulnerabilities to regulatory shifts and demographic trends-threaten Annaly's long-term revenue, profitability, and core business sustainability.

Catalysts

A diversified capital manager, engages in the mortgage finance business.

• Improving efficiency and cost reduction through significant investments in mortgage servicing technology and subservicing relationships are driving lower operating expenses for Annaly and enhancing long-term net margins and profitability.
  
• Ongoing demographic-driven demand for housing in the U.S., combined with chronically underbuilt housing inventory, is expected to support strong mortgage origination volumes, increasing Annaly's investment opportunities and driving higher long-term revenue growth.
  
• Broad adoption of advanced data analytics, automation, and digital tools is increasing transparency and operational agility in mortgage markets, enabling Annaly to refine risk management and capital allocation-supporting more stable earnings and potentially higher risk-adjusted returns over time.
  
• Annaly's proactive portfolio diversification and disciplined capital deployment-evidenced by a growing presence in agency MBS, residential credit, and MSRs-strengthens and stabilizes revenue streams while smoothing earnings across market cycles.
  
• Industry-wide consolidation and enhanced capital market liquidity, particularly in agency and non-agency MBS, position Annaly to benefit from greater scale and more dynamic portfolio management, which should support better portfolio returns and earnings growth.

Annaly Capital Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Annaly Capital Management's revenue will grow by 46.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 53.7% today to 95.3% in 3 years time.
• Analysts expect earnings to reach $3.2 billion (and earnings per share of $3.04) by about August 2028, up from $575.1 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 7.0x on those 2028 earnings, down from 23.0x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 13.1x.
• 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 11.29%, as per the Simply Wall St company report.

Annaly Capital Management Future Earnings Per Share Growth

Risks

• Persistent high mortgage rates and affordability challenges have led to increased housing inventory and four consecutive months of negative home price appreciation (HPA), which introduces downside risk to future mortgage origination volumes and could diminish opportunities for Annaly, impacting long-term revenue and earning power.
  
• Annaly's reliance on short-term repurchase agreement (repo) funding-with average repo maturities under two months and a leverage ratio rising to 5.8x-exposes the company to sustained yield curve inversion or funding market stress, potentially compressing net interest margins and reducing earnings stability.
  
• Regulatory risks remain significant, as continued or heightened government involvement in agency mortgage markets (GSE reform, privatization uncertainties, and regulatory capital requirements) could limit profitability and increase operational constraints, potentially curtailing revenue generation and book value growth over time.
  
• Structural evolution in housing finance-such as technological innovation and expansion of alternative credit risk transfer or insurance-based solutions-may shrink the addressable market for traditional mortgage-backed securities, increasing the risk of disintermediation and putting long-term pressure on Annaly's core business lines and revenue streams.
  
• Demographic headwinds, including an aging population and slower household formation, could reduce long-term housing demand and, by extension, mortgage activity, leading to fewer investment opportunities and potential declines in both revenue growth and return on equity over the secular trend horizon.

Valuation

• The analysts have a consensus price target of $20.932 for Annaly Capital Management 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 $3.4 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of $20.58, the analyst price target of $20.93 is 1.7% 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.