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Two Harbors Investment (TWO) Q4 Earnings: What to Expect?

Zacks Equity Research

Two Harbors Investment Corp. TWO is scheduled to report fourth-quarter and 2018 results on Feb 6, before the market opens. The company’s results will likely reflect year-over-year decline in its net interest income (NII), while core earnings per share is expected to remain flat.

In the last reported quarter, this hybrid mortgage real estate investment trust posted core earnings per share of 48 cents, in line with the Zacks Consensus Estimate.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions and met in the other two, average positive beat being 3.14%. The graph below depicts this surprise history:

Two Harbors Investments Corp Price and EPS Surprise

Two Harbors Investments Corp Price and EPS Surprise | Two Harbors Investments Corp Quote

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

Factors to Consider

Two Harbors Investment is primarily focused on investments in agency residential mortgage-backed securities (RMBS) and MSRs. The company’s strategy of pairing these two instruments offers it a competitive edge.

In the third quarter, the company closed the acquisition of CYS Investments, in a bid to expand its market capitalization and equity base. The transaction also improved the company’s stock liquidity. Management expects the integration of both companies will lower expense ratio and enhance its portfolio of target assets that includes non-agency investments as well compared to an agency-only strategy. We expect this strategic move to support the company’s upcoming results.

Further, the company’s mortgage portfolio is expected to benefit from strong residential housing tailwinds.

However, a spike in fixed-income volatility, weaker U.S. economic fundamentals, government shutdown and escalating trade tensions have elevated concerns over global economies, and might act as dampeners for the company in the Dec-end quarter.

Amid this challenging environment, as the company is prioritizing risk management, any robust returns are expected to remain elusive. In fact, it remains focused to increase hedge allocation to swap hedges.

Amid these, the company’s NII for the quarter may disappoint. Specifically, for fourth-quarter 2018, the Zacks Consensus Estimate for the company’s NII is pegged at $89.4 million and represents a year-over-year decline of 10.9%.

Furthermore, an increase in interest rates, volatility and wider Agency MBS spreads in the Oct-Dec quarter is anticipated to impact the company’s net book value.

Hence, there is lack of any solid catalyst prior to the fourth-quarter earnings release. As such, the Zacks Consensus Estimate of earnings per share for the to-be-reported quarter remained unchanged at 47 cents, over the past month. The figure remains flat year over year.

Earnings Whispers

Our proven model does not conclusively show that Two Harbors Investment is likely to beat estimates this quarter. 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: Two Harbors Investment’s Earnings ESP is -3.57%.

Zacks Rank: The company currently carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of the earnings beat.

Stocks That Warrant a Look

While other players in the REIT space are lined up to report their financial results, below are three stocks, poised to beat on earnings per the proven Zacks model. You can see the complete list of today’s Zacks #1 Rank stocks here.

Americold Realty Trust COLD, slated to report fourth-quarter results on Feb 21, has an Earnings ESP of +0.29% and holds a Zacks Rank of 3.

American Tower Corporation AMT, set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

Healthcare Realty Trust HR, scheduled to report quarterly numbers on Feb 13, has an Earnings ESP of +0.31% and carries a Zacks Rank of 3.

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