On Tuesday, B.Riley adjusted its outlook on Ellington Financial Inc. (NYSE:EFC), reducing the price target to $14 from the previous $15 while sustaining a Buy rating on the stock. The adjustment follows a revision of earnings estimates and a dividend reduction for the company.
The firm now expects adjusted earnings per share (EPS) for fiscal years 2024 and 2025 to be at $1.43 and $1.70, down from the initial forecasts of $1.81 and $2.05, respectively. This revision takes into account the current challenges until interest rate volatility decreases, Ellington fully deploys its excess capital, and its reverse mortgage originator Longbridge stabilizes its production.
The firm anticipates that the dividend, now adjusted to $0.13 per month from $0.15, will be covered by core earnings at an average of 89% in fiscal year 2024, with coverage expected to increase to 109% in fiscal year 2025. This projection is based on the possibility of at least two Federal Reserve rate cuts and a potential steepening of the yield curve in the second half of 2024, which could provide tailwinds for the company.
B.Riley continues to regard Ellington as a leading mortgage real estate investment trust (mREIT) with strong potential to capitalize on the next economic cycle due to its diversified platform and in-house originators. However, the firm's conservative leverage ratio, currently at 2.0 times total recourse, is seen as a limitation to earnings until it can be adjusted closer to the 2.5 times range.
The firm's strategy is expected to remain focused on credit investments, with high-yielding and short-duration strategies like RTL and distressed commercial playing a central role. While the agency strategy's contribution is anticipated to be of higher quality, it is expected to become less significant as Ellington explores other opportunities in the credit space. A positive impact on the net interest margin (NIM) is expected as a result of the ongoing turnover of the agency portfolio.
Finally, B.Riley highlighted potential for earnings expansion through strategic capital deployment, with Ellington having $228.9 million in cash which represents significant investment potential. Additionally, a recovery in the margins of reverse mortgage production is expected to serve as a tailwind for the second half of 2024 into 2025. Ellington's stock is currently trading at 0.83 times its most recently reported January book value of $13.73 per share, which contrasts with the peer average of 0.74 times.
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