Earnings Preview: American Capital

Zacks

American Capital Agency Corp. (AGNC), a real estate investment trust, is slated to release its second quarter 2011 results on July 26, 2011, after the closing bell. The current Zacks Consensus Estimate for the second quarter is pegged at $1.34 per share, representing a year-over-year growth of about 26.4%.

First Quarter Recap

American Capital Agency reported earnings of $1.48 per share during first quarter 2011, compared with $2.13 in the year-earlier quarter. Excluding one-time items, recurring net income in the reported quarter was $1.30 per share. The recurring earnings for first quarter 2011 missed the Zacks Consensus Estimate by 6 cents.

The company generated total revenue of $144.5 million during first quarter 2011 compared with $56.6 million in the year-ago quarter. Total revenue in the reported quarter comfortably beat the Zacks Consensus Estimate of $106 million.

As of March 31, 2011, the company's book value per share was $25.96 compared with $24.24 at the end of fiscal 2010. At quarter end, American Capital Agency had cash and cash equivalents of $300.6 million.

Agreement of Analysts

In the last 7 days, 1 out of the 11 analysts covering the stock revised the EPS estimate downward for the second quarter of 2011 while none moved in the opposite direction. Similarly, over the last 30 days, 2 out of the 11 analysts decreased their estimates for the second quarter of 2011 while none increased the same.

Magnitude of Estimate Revisions

Taking into account the analysts’ earnings revision, the Zacks Consensus Estimate for the second quarter of fiscal 2011 remained constant over the last 7 days but  increased by 7 cents to $5.61 for fiscal 2011. However, in the last 30 days, the Zacks Consensus Estimate decreased by a penny to $1.34 per share for second quarter while it increased by three cents to $5.61 per share for fiscal 2011.

Our Recommendation

American Capital invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae (FNMA), Freddie Mac (FMCC) and Ginnie Mae. Specifically, American Capital invests in FMCC Gold certificates, FNMA certificates, and GNMA certificates. American Capital Agency's securities now have an explicit government guarantee, which makes agency REITs a lucrative prospect for investors.

However, the residential mortgage market in the U.S. has experienced defaults, credit losses and liquidity concerns in the recent past, which have reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate related assets, including agency securities and other high-quality RMBS (residential mortgage backed securities) assets.

As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced certain amount of volatility. Increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance of American Capital going forward.

We currently have a Zacks #3 rank on American Capital, which translates into a short tem Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

AMERICAN CAPITAL AGENCY CORP (AGNC): Read the Full Research Report

FEDERAL HOME LN MTG CORP (FMCC): Read the Full Research Report

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