Chimera Investment Corp (NYSE:CIM) has a 1-year change of 51.6%, can it move even higher now?
Chimera Investment Corporation Company Profile :
Industry : Consumer Financial Services
Sector : Financial
Chimera Investment Corporation is a real estate investment trust (REIT). The company is primarily engaged in the business of investing, on a leveraged basis, in a diversified portfolio of mortgage assets, including agency residential mortgage-backed securities (RMBS), non-agency RMBS, agency commercial mortgage backed securities (CMBS), residential mortgage loans and real estate related securities. The mortgage backed securities (MBS) and real estate-related securities the company purchases may include investment-grade and non-investment grade classes, including the BB-rated, B-rated and non-rated classes. The company invests in mortgage pass-through certificates issued or guaranteed by the Government National Mortgage Association (Ginnie Mae), The Federal National Mortgage Association (Fannie Mae) or The Federal Home Loan Mortgage Corporation (Freddie Mac). The company may also invest in collateralized mortgage obligations (CMOs) issued by the Agencies.
Chimera's stock price closed on Monday 6th February 2017 at $18.01, making a new 52-week high at $18.05. The question is now, can the stock move higher or is it poised for a correction? We will take a look at fundamental analysis covering a 4-year trend, mention current technical analysis and our discounted cash flow valuation, based on earnings growth for next 5 years.
Fundamental analysis:
Income Statement:
For the 4-year trend analysis comparing years 2012 up to 2015, we notice that total revenue and gross profit are in an uptrend, but so is operating expenses, and the result is that operating income peaked at FY 2014, and had a decline of 57.51% in FY 2015. Net income follows the exact same 4-year trend as the operating income. Diluted normalized EPS have increased during these 4 years, peaked at FY 2014 and declined 45.27% in FY 2015 at $1.62, from $2.96 in FY 2014. This large decline of profitability in FY 2015 compared to FY 2014, can be attributed to a large degree to very big increase in operating expenses. On quarterly basis, examining the trend of the last 4 quarters, we observe an absolute increase in total revenue, gross profit, operating income, net income and diluted normalized EPS.
Balance Sheet:
Some key points examining the 4-year trend are the significant decrease of Cash & Equivalents and very large increase of total debt, while total equity has decreased over the same mentioned period. On a quarterly basis period, for the last 4 quarters we notice an increase of total debt, which is something to focus on as we are in a scenario of rising interest rates.
Cash Flows:
Our 4-year trend shows a positive absolute increase in cash from operating activities, which is good as operating activities are considered the key element of business operation, but both cash from investing activities and cash from financing activities show a very volatile trend, and there is the positive effect of reducing debt in FY 2015.
Relative Valuation:
Chimera has lower P/E and price to sales ratios than relevant ratios of the industry for a trailing twelve months period, and a lower price to book ratio than the relevant ratio of the industry for most recent quarter. These figures make stock attractive and relative undervalued.
Profitability, Management Effectiveness and Growth:
The company has a higher gross margin, operating margin and net margin than the relevant margins of the industry. The only margin which is lower for the company in a 5-year trend analysis is the gross margin. Especially worth mentioning is the net profit margin of 50.9% (TTM), which is 134.13% higher than the net profit margin of 20.74% for the industry. However management effectiveness seems to be the weak spot for the company. All following three ratios, return on equity, return on assets, and return on Investment for the company are lower than relevant financial ratios for the industry, on a trailing twelve month period. In terms of growth, the company shows a very large increase in EPS of 248.34% (TTM), which is much higher than the relevant increase of EPS for the industry, but we do not like the fact that sales growth for same period has been negative, while the industry had an increase in sales of 6.23% for last twelve months.
Financial Strength, Efficiency and Dividend Yield:
While long term debt to equity ratio and total debt to equity for the company and most recent quarter are lower than the relevant ratios of the industry, their absolute levels are considered too high, meaning that the company uses a lot of leverage, and is considered risky. We would like to see this large financial leverage get significant reduced and operating efficiency increase. Receivable turnover ratio for the company for last twelve months is lower than the relevant ratio of the industry.
Now dividend yield is a factor to consider adding the stock to a portfolio for income generating purposes. The company has a current dividend yield of 11.1%, much higher than 2.01% dividend yield for the industry. However this dividend yield is lower than 5-year average dividend yield of 16.72% for the company, and we have concerns about sustainability of high current payout ratio of 102.11% as well.
Technical Analysis:
On a daily, weekly and monthly basis, moving averages and technical indicators give a strong buy summary. However any correction of stock price would be preferred as a long-term investment.
Intrinsic Value:
Our discounted cash flow analysis using EPS for next 5 years with 5% annual growth, and only 2% growth after, provides a stock value per share of $30.41.
Investment Conclusion:
Chimera stock seems relative undervalued at current level of about $18.00. The large dividend yield is a great positive factor to add it to a portfolio. But caution is required as the company has a very large financial leverage and in a rising interest rates environment, leverage can add a lot of volatility to profitability.
Disclaimer: The author does not have not any Chimera stock in his portfolio. Sources used are Investing.com and Zacks.com.