Expanding Asset Management And ABF Will Broaden Business Prospects

Key Takeaways

• Expanding asset management and origination via private funds and strategic acquisitions is set to drive growth and operational efficiency.
  
• Investment in asset-backed finance and strategic capital actions point to increased shareholder value and enhanced stock valuation potential.
  
• Market volatility, competition, and execution risks in expansion pose significant threats to Rithm Capital’s revenue and margins across multiple business areas.

Catalysts

Operates as an asset manager focused on real estate, credit, and financial services in the United States.

• Rithm Capital is focusing on expanding its asset management business with private funds, including their largest real estate fund commitment of $3.2 billion, which is expected to drive future revenue growth.
  
• The company's investment in asset-backed finance (ABF) products, which are in high demand, is anticipated to generate diversified risk with high returns, potentially impacting net margins positively.
  
• Rithm's continuous growth in earnings available for distribution, currently at 17% return on equity, suggests a potential increase in future earnings and shareholder value.
  
• Efforts to explore strategic capital actions, including potential public offerings or other structuring options to unlock value, could significantly impact earnings per share (EPS) and increase the stock's valuation.
  
• Rithm's focus on expanding its origination and servicing businesses, alongside partnerships and strategic acquisitions, is expected to grow its revenue base and improve operating efficiency.

Rithm Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rithm Capital's revenue will grow by 17.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.6% today to 21.3% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $2.07) by about May 2028, up from $625.5 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 9.3x on those 2028 earnings, down from 9.5x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 11.8x.
• 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 9.01%, as per the Simply Wall St company report.

Rithm Capital Future Earnings Per Share Growth

Risks

• The company faces significant market volatility, which may affect its ability to maintain stable returns and consequently impact its revenue and net margins.
  
• There is a risk of execution in expanding its asset management business, especially as it ventures into new sectors such as energy and infrastructure, potentially affecting future earnings.
  
• Although the company states it is undervalued, its reliance on external factors to unlock shareholder value may hinder near-term stock performance, impacting the ability to improve net margins and book value.
  
• Increased competition and margin compression in mortgage origination, particularly in maintaining market share, could limit revenue growth and negatively impact net margins.
  
• The company's securitization processes face challenges from market spread volatility, which could adversely affect capital raises and consequently, future earnings.

Valuation

• The analysts have a consensus price target of $13.75 for Rithm Capital 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 $16.0, and the most bearish reporting a price target of just $12.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 9.0%.
• Given the current share price of $11.17, the analyst price target of $13.75 is 18.8% 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.