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What's in Store for PennyMac Mortgage's (PMT) Q3 Earnings?

Zacks Equity Research

PennyMac Mortgage Investment Trust PMT is slated to report third-quarter 2019 results after market close on Oct 31. While its revenues in the third quarter are expected to reflect year-over-year improvement, earnings might have witnessed a decline.

In the last reported quarter, this mortgage real estate investment trust (mREIT), which primarily invests in residential mortgage loans and mortgage-related assets reported earnings per share (EPS) of 50 cents, surpassed the Zacks Consensus Estimate of 48 cents.

Over the preceding four quarters, the company surpassed the Zacks Consensus Estimate on all occasions, the average positive surprise being 40.05%. The graph below depicts this surprise history:

PennyMac Mortgage Investment Trust Price and EPS Surprise

PennyMac Mortgage Investment Trust Price and EPS Surprise

PennyMac Mortgage Investment Trust price-eps-surprise | PennyMac Mortgage Investment Trust Quote

Let’s see how things are shaping up for this announcement.

During the third quarter, mortgage REITs are expected to have witnessed expansion of production pipelines driven by strong origination activity. Given the recent mortgage-rate declines, refinancing activities have gone up, along with rise in originations.

Specifically, the 30-year mortgage rates declined from 3.75% in the week ended Jul 3, 2019 to 3.64% in the week ended Sep 26, 2019. With mortgage rates at three-year lows, elevated levels of originations in the market will likely have escalated mortgage loan origination fees for PennyMac Mortgage during the third quarter.

Further, the Mortgage Banker Association (MBA) weekly application index indicates loan locks — the commitment to fund a mortgage that drives GAAP revenues — was solid in third-quarter 2019. In addition, upbeat trends in the primary-secondary spreads compared with the second-quarter level are encouraging, indicating higher gain on sale margins for the quarter under review.

These are likely to have driven PennyMac Mortgage’s top-line growth in the quarter. In fact, the Zacks Consensus Estimate for third-quarter revenues is pegged at around $117 million, calling for a year-on-year improvement of 7.8%.

Nonetheless, high level of refinancing is expected  to have affected value of mortgage servicing rights (MSRs) during the September-end quarter. With a decent pool of MSRs, we anticipate PennyMac Mortgage’s servicing operations to have countered headwinds during the period under consideration.

Also, prior to the third-quarter earnings release, there is lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate for the July-September quarter EPS remained unchanged at 51 cents, over the past 30 days. Also, it represents a year-over-year fall of 17.7%.

Earnings Whispers

Our proven model doesn’t conclusively predict a positive surprise for PennyMac Mortgage this time around. A positive Earnings ESP is a meaningful and leading indicator of a likely earnings beat. This, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), makes us reasonably confident of a positive surprise. That is not the case here, as you will see below.

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

Earnings ESP: PennyMac Mortgage’s Earnings ESP is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

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

Stocks That Warrant a Look

Digital Realty Trust, Inc. DLR, scheduled to release earnings on Oct 29, has an Earnings ESP of +2.61% and carries a Zacks Rank of 3, at present.

Senior Housing Properties Trust SNH, slated to report July-September quarter results on Nov 7, has an Earnings ESP of +3.23% and currently holds a Zacks Rank of 2.

Stag Industrial, Inc. STAG, set to release quarterly figures on Oct 30, has an Earnings ESP of +3.30% and carries a Zacks Rank of 3, at present.

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