Real estate investment trust (REIT) Two Harbors Investment Corp. (TWO) in New York City finances, manages, and invests in residential mortgage-backed securities (RMBS), non-agency securities, mortgage servicing rights, and other financial assets in the United States.

Last month, JPMorgan Chase & Co. (JPM) cut its price objective on TWO’s shares to $5.00 from $6.50 and accorded the stock a neutral rating. Credit Suisse Group AG (CS) also gave the stock a neutral rating and cut its price target to $5.25 from $6.00.

Over the past year, TWO’s stock has declined 25.4% in price and 8.8% year-to-date to close yesterday’s trading session at $5.26. It has gained 3.5% over the past month and 1.9% over the past five days.

Here are the factors that could affect TWO’s performance in the near term:

Mixed Financials

For its fiscal first quarter, ended March 31, 2022, TWO’s income before income taxes and net income attributable to common stockholders increased 27.1%, and 21.8% year-over-year, to $334.07 million and $271.52 million, respectively. However, its comprehensive loss attributable to common stockholders rose 24.3% from the prior-year quarter to $60.32 million. And its net interest income came in at $22.53 million, down 32.5% from the prior-year period.

Mixed Analyst Sentiments

The $0.72 consensus EPS estimate for its fiscal year 2022 indicates a 12.2% year-over-year decrease. Likewise, the $42.93 million consensus revenue estimate for the same year reflects a 45.9% decline. However, the Street’s $0.77 EPS estimate for fiscal 2023 indicates a 6.9% year-over-year increase. Likewise, the Street’s $49.17 million revenue estimate for the same year reflects a 14.5% improvement from the prior year.

Mixed Profit Margins

TWO’s 80.26% trailing 12-month gross profit margin is 24.9% higher than the 64.24% industry average. Its trailing 12-month net income margin and ROA of 53.32% and 1.89%, respectively, are 81.1% and 48.9% higher than their 29.44% and 1.27% industry averages. However, its 8.90% trailing 12-month ROE  is 29.83% lower than the 12.69% industry average.

POWR Ratings Reflect Uncertainty

TWO has an overall C rating, which equates to Neutral in our proprietary POWR Rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

TWO has a Quality grade of C, which is in sync with its mixed profitability. The stock has a Value grade of C. This is justified because its 6.34x trailing 12-month non-GAAP P/E is 36.5% lower than the 9.98x industry average, while its 3.81 trailing 12-month Price/Sales multiple is 31.6% higher than the 2.89 industry average.

In the 31-stock REITs – Mortgage industry, TWO is ranked #20. The industry is rated D.

Click here to see the additional POWR Ratings for TWO (Growth, Momentum, Stability, and Sentiment).

View all the top-rated stocks in the REITs – Mortgage industry here.

Bottom Line

Although the company posted solid bottom-line improvement, the Street expects its EPS to decline this year. Also, analysts expect a significant decline in its revenues. Furthermore,  five  of seven Wall Street analysts rating the stock have rated it Hold, while only two rated it Buy. Hence, I think it might be wise to wait for a better entry point in the stock.

How Does Two Harbors Investment Corp. (TWO) Stack Up Against its Peers?

While TWO has an overall POWR Rating of C, one might consider looking at its industry peers, TPG RE Finance Trust, Inc. (TRTX) and New Residential Investment Corp. (NRZ), which have an overall B (Buy) rating.

TWO shares were trading at $5.37 per share on Wednesday morning, up $0.11 (+2.09%). Year-to-date, TWO has declined -3.98%, versus a -14.84% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

More Resources for the Stocks in this Article