Calculated Partnerships And Direct Lending Propel Growth Amid Market Challenges

Key Takeaways

• Strategic expansions and partnerships in real estate and financial services are expected to significantly boost earnings and shareholder returns.
  
• Integration of acquisitions and focus on technology in mortgage services will likely increase market share and enhance margins.
  
• Economic uncertainties, rising interest rates, and intense competition pose risks to Rithm Capital's growth, revenue, and profitability amidst expansion and credit performance challenges.

Catalysts

Operates as an asset manager focused on real estate, credit, and financial services.

• Expansion into new investment verticals and a focus on strategic partnerships within commercial real estate suggest future capital deployment will lead to significant rewards for shareholders. This is expected to positively impact earnings and return on equity.
  
• The acquisition and successful integration of Sculptor, which has shown excellent performance and is already generating fund inflows, is likely to meaningfully contribute to Rithm's bottom line, enhancing overall earnings potential.
  
• Growth in direct lending and private credit, as banks pull back in lending, creates an opportunity for Rithm to expand and capitalize on new financial services areas. This expansion is expected to drive revenue and earnings growth.
  
• Rithm’s significant scale in mortgage servicing and origination, combined with strategic investments in technology and customer experience, positions the company to increase its market share and improve margins, thus positively impacting revenue and net margins.
  
• The management’s focus on disciplined capital allocation and the potential to grow assets under management (AUM) across various platforms and strategies will likely enhance earnings and return on equity in the long term.

Rithm Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rithm Capital's revenue will grow by 24.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 18.2% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $1.95) by about November 2027, up from $484.3 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 8.8x on those 2027 earnings, down from 11.4x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 1.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.41%, as per the Simply Wall St company report.

Rithm Capital Future Earnings Per Share Growth

Risks

• Economic and geopolitical uncertainties, such as ongoing wars and a highly contested election, could adversely impact the company’s growth, affecting revenue and earnings projections.
  
• Rising interest rates and fiscal deficits could lead to higher borrowing costs, which might compress net margins and impact earnings if the company relies on debt financing.
  
• The company's growth strategy involving acquisitions and M&A activity may carry execution risk, which could impact revenue and profitability if these expansions do not materialize as planned.
  
• Intense competition in the mortgage servicing market, particularly with dominating players in the wholesale channel, may limit market share growth and potentially affect revenue streams.
  
• The potential for changes in consumer credit performance or delinquencies amid macroeconomic uncertainty could affect asset quality and impact earnings outcomes.

Valuation

• The analysts have a consensus price target of $13.05 for Rithm Capital 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 2027, revenues will be $5.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 9.4%.
• Given the current share price of $10.66, the analyst's price target of $13.05 is 18.3% higher.
• 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.