Last Update 05 Dec 25
NLY: Easing Mortgage Rates And Tighter Spreads Will Support Balanced Future Returns
Analysts have nudged their price target on Annaly Capital Management higher, lifting it by $1.00 to $22.50. They cite improving mortgage market dynamics, including lower 30-year mortgage rates, tighter agency spreads, and rising refinancing activity.
Analyst Commentary
Bullish analysts view the higher price target as a reflection of improving fundamentals in Annaly Capital Management's core mortgage portfolio, with better rate and spread dynamics supporting a more constructive earnings outlook.
They highlight that the combination of lower mortgage rates and tighter agency spreads should enhance asset valuations and potentially compress funding costs, improving the company's return profile and supporting a higher fair value range for the shares.
Bullish Takeaways
- Recent declines in 30-year mortgage rates are expected to support higher mortgage origination and trading volumes. This is creating a more favorable backdrop for Annaly Capital Management's asset deployment and earnings growth.
- Tightening agency spreads suggest stronger pricing for the company's mortgage-backed securities portfolio, which can help drive book value stability and justify a higher valuation multiple.
- An uptick in mortgage application volumes, particularly a 38 percent sequential increase in refinancing activity, points to rising transaction activity that could translate into improved portfolio turnover and fee-related opportunities.
- The aligned upward revisions to the price target indicate growing confidence that execution against the current macro backdrop can support returns that are closer to, or above, prior cycle averages.
Bearish Takeaways
- Despite recent improvements, analysts caution that the mortgage market has not yet returned to a fully normalized state. This leaves Annaly Capital Management exposed to renewed volatility in rates and spreads.
- Elevated uncertainty around the path of monetary policy and funding costs could still pressure net interest margins, limiting upside to earnings and book value accretion.
- Refinancing-driven activity, while currently supportive, may prove cyclical and could fade if macro conditions or rates reverse. This raises questions about the durability of recent volume trends.
- Some analysts remain sensitive to the risk that tighter spreads compress forward return potential, meaning that a higher price target may depend on consistently strong execution and disciplined capital allocation.
What's in the News
- Annaly Capital Management completed the most recent buyback tranche with zero shares repurchased and no cash deployed under the January 2, 2025 authorization, indicating no incremental capital return activity in the latest quarter (Key Developments).
- The company was removed from the FTSE All-World Index (USD), which could modestly affect passive fund ownership and trading liquidity tied to that benchmark (Key Developments).
Valuation Changes
- Fair Value Estimate, unchanged at $22.10 per share, indicating no adjustment to the intrinsic value assessment.
- Discount Rate, risen slightly from 9.20 percent to approximately 9.20 percent, reflecting a marginally higher required return on equity.
- Revenue Growth, fallen slightly from about 31.46 percent to 30.53 percent, suggesting a modestly more conservative top line outlook.
- Net Profit Margin, risen modestly from roughly 82.17 percent to 83.94 percent, implying a slightly stronger long term profitability profile.
- Future P/E, effectively unchanged, edging from 7.37x to 7.37x, signaling a stable forward valuation multiple.
Key Takeaways
- Strategic positioning in MSR and Agency MBS portfolios enhances revenue and net margins through attractive spreads and hedging strategies.
- Improved financing and economic leverage elevate earnings distribution, bolstering revenue growth and strong margins.
- Rising interest rates, economic uncertainty, and increased competition may pressure Annaly's portfolio returns, market share, and profitability across various mortgage sectors.
Catalysts
About Annaly Capital Management- A diversified capital manager, engages in the mortgage finance business.
- Annaly Capital Management is well-positioned within its MSR business due to the lower profitability of mortgage lenders, which leads to a need to quickly offload MSRs. This could enhance revenue by acquiring MSR at attractive rates as originators seek liquidity.
- The residential credit portfolio is expected to see growth through increases in securitization despite tighter credit spreads and greater issuance activities, suggesting an impact on revenue and potentially net margins as discipline remains a priority.
- Agency MBS spreads remain attractive on an absolute and relative basis due to improved technicals and the ongoing Fed rate cutting cycle. Coupled with a conservative hedging strategy, this should enhance net interest margin.
- The business is benefiting from a strategic shift in coupon allocation by positioning in higher coupon segments (6% and 6.5%) within its Agency MBS portfolio, potentially enhancing the economic return and net margins.
- Improved financing costs and economic leverage, along with $400 million in accretive common equity raised, have set the stage for increased earnings available for distribution, thus supporting revenue growth and stronger margins moving forward.
Annaly Capital Management Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Annaly Capital Management's revenue will grow by 46.9% annually over the next 3 years.
- Analysts assume that profit margins will increase from 53.7% today to 95.3% in 3 years time.
- Analysts expect earnings to reach $3.2 billion (and earnings per share of $3.04) by about September 2028, up from $575.1 million today.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, down from 24.0x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 14.1x.
- Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 11.02%, as per the Simply Wall St company report.
Annaly Capital Management Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Rising interest rates and market volatility have led to wider mortgage spreads and could negatively impact Annaly's portfolio returns, posing a risk to future earnings growth.
- High inflation and economic uncertainty may affect the U.S. housing market dynamics, potentially impacting Annaly's residential credit and agency MBS businesses' revenue and profitability.
- Increased competition from private equity, asset managers, and insurance companies in the non-agency mortgage market could pressure Annaly's market share and margins.
- Changes in GSE reform and the potential reduction of the GSE footprint could alter the competitive landscape of the mortgage market, impacting Annaly’s revenue from new opportunities.
- Elevated hedging costs and prolonged periods of interest rate volatility could erode the returns on Annaly's Agency MBS investments, affecting overall net margins.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $21.023 for Annaly Capital Management based on their expectations of its future earnings growth, profit margins and other risk factors.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 11.0%.
- Given the current share price of $21.49, the analyst price target of $21.02 is 2.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
How well do narratives help inform your perspective?
Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.