Analyst Favors Annaly Yield and Book Value Discount

The fourth-quarter earnings fell short of Sterne Agee’s expectations as leverage remained low and interest expense came in higher than expected on hedging costs. At the same time, book value per share increased to $13.10 — barely short of Sterne Agee’s estimate of $13.12.

Book value per share grew by 1.8% from $12.87 sequentially. The increase was the result of narrowing agency mortgage-backed securities spreads, which were driven mostly by spreads catching up to a moderation of the interest rate rally last quarter.

Although Sterne Agee considers the book value very attractive at the moment, it is reducing its 2015 and 2016 estimates of core earnings per share (EPS). The 2015 EPS estimate was reduced to $1.15 from $1.18 and 2016 EPS estimate was reduced to $1.00 from $1.01. These changes to the estimates reflect Sterne Agee’s view of forward yields, prepayments and leverage, which should remain robust for the medium term.

Annaly trades at nine-times EPS estimates for 2015, which is relatively cheap compared to the broad markets at current prices, and just a little higher for 2016 estimates at 10.6 times.

The firm stated its outlook for the future as:

For the short and medium term, we reiterate our Buy rating as a compelling total return opportunity. The stock remains at a 20% discount to book value and combined with the 11% yield makes for a ~30% annualized expected return to our price target. We further expect the shares to fare favorably if broader markets’ weakness from global macroeconomic and political fears takes hold.

Annaly shares were relatively flat at $10.61 in Monday’s premarket trading. The stock has a consensus analyst price target of $11.44 and a 52-week trading range of $10.36 to $11.95. This company is considered one of the largest U.S. mortgage REITs by market cap, coming in at roughly $10 billion.

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