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Here's How Chimera (CIM) Looks Just Ahead of Q3 Earnings

Zacks Equity Research
·4 min read

Chimera Investment Corporation CIM is scheduled to report third-quarter 2020 results on Nov 4, before the opening bell. The company’s quarterly earnings per share (EPS) and net interest income (NII) are expected to have declined year over year.

In the last reported quarter, this mortgage real estate investment trust (mREIT) reported core earnings of 32 cents per share, surpassing the Zacks Consensus Estimate of 29 cents. Robust net realized gains on sales of investments drove bottom-line performance.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on three occasions and missed in the other. It delivered a surprise of 28%, on average, during this period. The graph below depicts this surprise history:

Chimera Investment Corporation Price and EPS Surprise

Chimera Investment Corporation Price and EPS Surprise
Chimera Investment Corporation Price and EPS Surprise

Chimera Investment Corporation price-eps-surprise | Chimera Investment Corporation Quote

Factors to Note

The health of the mortgage market has continued to improve since lows observed in March. The Federal Reserve has been playing a crucial part in stabilizing the mortgage market with continued mortgage backed securities (MBS) purchases and keeping the interest rates low.

In fact, given the strong correlation between Federal Reserve's target rate and repo rates, cost of funds is expected to have taken a significant dive in the third quarter. Low funding cost during the quarter might have reduced interest expenses for Chimera, thereby driving net interest margin.

Moreover, the improvement in housing market has led to a recovery in securitization volume. This along with strong credit spread during the quarter are likely to have contributed to Chimera’s securitization strategy.

Amid the low mortgage rate environment that has driven prepayment speeds, Chimera’s Agency commercial MBS (CMBS) portfolio may have continued providing the company with prepayment protection.

Specifically, 15% of the company’s investment portfolio primarily consists of Ginnie Mae construction loan and Ginnie Mae permanent loan certificates. The borrowers of the underlying mortgage loan have to pay a prepayment penalty if the loan is prepaid in the initial 10 years of the loan, thereby providing decent prepayment protection to the company.

However, interest earnings assets at the end of second quarter remained lower than the balance as of 2019 end. The loss of earned interest income on such investments is anticipated to have dampened interest income growth in the third quarter, thereby weighing on NII.

Moreover, majority of the company’s investments are floating-rate ones, tied to LIBOR. Hence, lower LIBOR rates during the third quarter are anticipated to have marred NII growth. For the September-end quarter, NII estimate is pegged at $110.2 million, indicating year-over-year decline of 22.2%.

Lastly, prior to the third-quarter earnings release, the company’s activities during the quarter were inadequate to gain analyst confidence. Accordingly, the Zacks Consensus Estimate for the company’s EPS has been unchanged at 31 cents over the past month. It also suggests a decline of 38% from the year-ago reported figure.

Here is what our quantitative model predicts:

Chimera does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

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

Earnings ESP: The Earnings ESP for Chimera is 0.00%.

Zacks Rank: Chimera carries a Zacks Rank #3.

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

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a beat this quarter:

Lexington Realty Trust LXP, set to report quarterly numbers on Nov 5, currently has an Earnings ESP of +1.33% and a Zacks Rank of 3.

National Storage Affiliates Trust NSA, slated to release third-quarter earnings on Nov 5, has an Earnings ESP of +1.94% and a Zacks Rank of 2 (Buy) at present.

Ventas, Inc. VTR, slated to release third-quarter earnings on Nov 6, has an Earnings ESP of +2.03% and a Zacks Rank of 3 at present.

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