What's in the Cards for Annaly Capital's (NLY) Q3 Earnings?

Annaly Capital Management Inc. NLY is scheduled to report third-quarter 2019 results on Oct 30, after the market closes. The company’s earnings are likely to reflect a year-over-year decline.

In the last reported quarter, this mortgage real estate investment trust (REIT) posted core earnings, excluding PAA, of 25 cents per share, missing the Zacks Consensus Estimate by a whisker. Further, net interest income (NII) totaling roughly $177.4 million, witnessed a steep decline from the second-quarter 2018 tally of $334.1 million.

Over the last four quarters, the company beat the Zacks Consensus Estimate on one occasion, met in the other two and missed in another. It came up with an average negative surprise of 0.07% during this period. The graph below depicts this surprise history:

Annaly Capital Management Inc Price and EPS Surprise

Annaly Capital Management Inc Price and EPS Surprise

Annaly Capital Management Inc price-eps-surprise | Annaly Capital Management Inc Quote

Let’s see how things are shaping up prior to this announcement.

Factors at Play

While U.S. Treasury rates continued to fall across maturities in the third quarter, different parts of the yield curve inverted during this period. At the end of the quarter, the three-month rate stood at 1.88%, down from 2.12% reported at the second-quarter end, while the 30-year rate ended at 2.12% as compared to 2.52% recorded at the end of June.

Further, substantial decline in 10-year yield is expected to have resulted in lower mortgage rates. Specifically, the 30-year mortgage rates declined from 3.75% in the week ended Jul 3, 2019 to 3.64% in the week ended Sep 26, 2019.

Supported by the above-mentioned factors, the U.S. housing market will likely have picked up pace during the quarter. With this, mortgage REITs are expected to have witnessed expansion of production pipelines driven by strong origination activities. Given the consistently low-mortgage rates, refinancing activities have gone up in third quarter, along with rise in originations.

Moreover, the sharp pullback in Fannie Mae and Freddie Mac activities might have been a windfall for agency lenders. Amid this, we expect Annaly to have completed higher residential whole-loan securitization transactions.

However, substantial volatility in the agency market will likely have dampened Annaly’s quarterly performance. In fact, unfavorable relationship between the LIBOR rates and funding rate during the first half of the year is expected to have continued in the third quarter as well. Specifically, high repo rates and fall in LIBOR have compressed spreads. This unfavorable market dynamic is anticipated to have impacted the company’s net interest margin in third-quarter 2019.

Any disappointing agency performance is expected to have affected the company’s book value. In fact, per management, elevated financing rates for agency MBS relative to other short-term rates might have been a spoilsport in the to-be-reported quarter.

Moreover, the company expects to report higher prepayments in the third quarter due to the lagging effect of lower mortgage rates and seasonal factors.

Lastly, Annaly’s activities during the September-end quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for the third-quarter FFO remained unchanged at 25 cents in a month’s time. In addition, it indicates a 16.7% year-over-year decline.

Earnings Whispers

Our proven model does not conclusively show that Annaly is likely to beat estimates this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earning ESP: Annaly’s Earnings ESP is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Digital Realty Trust, Inc. DLR, scheduled to release earnings on Oct 29, has an Earnings ESP of +2.61% and carries a Zacks Rank of 3, at present.

Senior Housing Properties Trust SNH, slated to report July-September quarter results on Nov 7, has an Earnings ESP of +3.23% and currently holds a Zacks Rank of 2.

Stag Industrial, Inc. STAG, set to release quarterly figures on Oct 30, has an Earnings ESP of +1.1% and carries a Zacks Rank of 3, at present.

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