PennyMac Mortgage: Zacks’ Bear of the Day Play

PennyMac Mortgage Investment Trust (PMT) is a REIT that invests primarily in residential mortgage loans and mortgage-related assets. The company is externally managed by PNMAC Capital Management, an investment adviser.

The company invests in both newly originated prime mortgage loans and distressed mortgage loans but it is primarily focused on investing in distressed mortgage loans available for acquisition from financial institutions and engaging in correspondent lending.

Disappointing First Quarter Results 

The company reported its Q1 results on May 6. Net income for the quarter was $7.5 million, down 72% from the prior quarter.Net investment income was $37.7 million, down 29% from the prior quarter.  ROE declined to 2%, down 7% from the prior quarter.

Net income per share was $0.09, badly missing the Zacks Consensus Estimate of $0.63 per share. According to the management, results were adversely affected by a combination of factors, including lower than expected performance in the distressed loan portfolio, higher prepayment speeds that negatively affected MSR and ESS valuations, and hedge losses related to mortgage spread widening in the MBS portfolios.

Falling Estimates

Due to disappointing results, quarterly and annual estimates have been revised sharply downwards in the past few weeks by analysts.

Zacks Consensus Estimates for the current and next fiscal year now stand at $1.75 per share and $2.48 per share, from $2.58 per share and $2.73 per share, before the results. The company has missed Zacks Consensus Estimates in three out of last four quarters, with an average quarterly negative surprise of 18%.

Declining estimates sent PMT back to Zacks Rank # 5 (Strong Sell) last month. The company was earlier featured as the “Bear of the Day” on March 25; the stock is down more than 12% since then. But with a Zacks Rank of # 5 and Style Scores of “F” on Growth and “D” on value, the chances of a rebound look slim.

The Bottom Line

Adverse pricing conditions in the distressed loans market and a highly competitive origination  environment will continue to pose headwinds for the stock.

Further, a brightening economy and rising rate environment does not bode well for the profitability of the company.

Better Play in the Industry?

Investors looking for a better opportunity in the Real Estate operations industry could consider Jones Lang Lasalle (JLL) a Zacks Rank# 2 (Buy) Rated stock.

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