MSR Activity And Higher Coupon Segments Will Shape Our Future

Key Takeaways

• Strategic positioning in MSR and Agency MBS portfolios enhances revenue and net margins through attractive spreads and hedging strategies.
  
• Improved financing and economic leverage elevate earnings distribution, bolstering revenue growth and strong margins.
  
• Rising interest rates, economic uncertainty, and increased competition may pressure Annaly's portfolio returns, market share, and profitability across various mortgage sectors.

Catalysts

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

• Annaly Capital Management is well-positioned within its MSR business due to the lower profitability of mortgage lenders, which leads to a need to quickly offload MSRs. This could enhance revenue by acquiring MSR at attractive rates as originators seek liquidity.
  
• The residential credit portfolio is expected to see growth through increases in securitization despite tighter credit spreads and greater issuance activities, suggesting an impact on revenue and potentially net margins as discipline remains a priority.
  
• Agency MBS spreads remain attractive on an absolute and relative basis due to improved technicals and the ongoing Fed rate cutting cycle. Coupled with a conservative hedging strategy, this should enhance net interest margin.
  
• The business is benefiting from a strategic shift in coupon allocation by positioning in higher coupon segments (6% and 6.5%) within its Agency MBS portfolio, potentially enhancing the economic return and net margins.
  
• Improved financing costs and economic leverage, along with $400 million in accretive common equity raised, have set the stage for increased earnings available for distribution, thus supporting revenue growth and stronger margins moving forward.

Annaly Capital Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Annaly Capital Management's revenue will grow by 26.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 67.9% today to 76.2% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $3.03) by about May 2028, up from $847.4 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 10.7x on those 2028 earnings, down from 13.8x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 13.4x.
• 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 11.05%, as per the Simply Wall St company report.

Annaly Capital Management Future Earnings Per Share Growth

Risks

• Rising interest rates and market volatility have led to wider mortgage spreads and could negatively impact Annaly's portfolio returns, posing a risk to future earnings growth.
  
• High inflation and economic uncertainty may affect the U.S. housing market dynamics, potentially impacting Annaly's residential credit and agency MBS businesses' revenue and profitability.
  
• Increased competition from private equity, asset managers, and insurance companies in the non-agency mortgage market could pressure Annaly's market share and margins.
  
• Changes in GSE reform and the potential reduction of the GSE footprint could alter the competitive landscape of the mortgage market, impacting Annaly’s revenue from new opportunities.
  
• Elevated hedging costs and prolonged periods of interest rate volatility could erode the returns on Annaly's Agency MBS investments, affecting overall net margins.

Valuation

• The analysts have a consensus price target of $20.559 for Annaly Capital Management 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 $23.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 11.0%.
• Given the current share price of $19.62, the analyst price target of $20.56 is 4.6% 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.