Exploring Capital Structure Changes Could Unlock Shareholder Value

Key Takeaways

• Strategic acquisitions and expansion in asset management could drive growth in revenue and net margins, enhancing future earnings.
  
• A potential capital structure change, including a C-Corp conversion, could unlock shareholder value and improve earnings per share.
  
• Emphasis on asset-based finance and energy infrastructure growth introduces risks related to competition, execution, and market perception affecting earnings and margins.

Catalysts

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

• Rithm Capital plans to announce a global energy infrastructure platform, which could contribute to future revenue and earnings growth as the demand for power increases globally.
  
• The asset management business, bolstered by the acquisition of Sculptor, shows a strong performance and is expected to drive AUM growth, positively impacting future revenue and net margins.
  
• Newrez, Rithm's mortgage company, is expanding its servicing and origination capabilities, which could increase its revenue and return on equity in the coming years.
  
• Rithm's focus on growing third-party asset management and potentially doing more off-balance sheet, combined with opportunistic acquisitions and strategic capital deployment, should enhance future earnings.
  
• The company intends to explore a potential capital structure change, including the possibility of a C-Corp conversion and listing Newrez, which could unlock shareholder value and improve earnings per share.

Rithm Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rithm Capital's revenue will grow by 14.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.1% today to 19.6% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $2.03) by about March 2028, up from $835.0 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 10.1x on those 2028 earnings, up from 7.4x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 12.5x.
• 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 9.98%, as per the Simply Wall St company report.

Rithm Capital Future Earnings Per Share Growth

Risks

• The company acknowledges that certain forward-looking statements may be uncertain and may differ materially from actual results, which introduces risk and could impact future earnings and investor confidence.
  
• The potential change in capital structure to raise private capital and operate off balance sheet involves execution risks and market perception challenges, which could affect valuation and net margins.
  
• The ongoing focus on asset-based finance as a growth area is described as a competitive, hot topic with substantial interest from other asset managers, which could pressure competition and revenue growth.
  
• The company's intention to expand its REIT and engage in M&A activity introduces risks concerning the effective integration of acquired entities and potential changes in operational strategies that could impact earnings and return on equity.
  
• The emphasis on developing a global energy infrastructure platform relies on external partners and expertise, introducing risks related to execution in a rapidly evolving industry that could affect both revenues and net margins.

Valuation

• The analysts have a consensus price target of $13.227 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 2028, revenues will be $5.6 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of $11.82, the analyst price target of $13.23 is 10.6% 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.