At the current price of $13, what is the market’s view of Two Harbors Investment’s future operating performance? Two Harbors Investment’s common shares will need to reach $22 to achieve average annual stock market performance of 9.0% over the next 6 years. Upper quartile performance will require a $25 Two Harbors Investment stock price by 2029.
Executive Summary
- Two Harbors Investment’s important characteristics: above average expected growth, low stability, low financial strength, and very low profitability. A big negative influence on Two Harbors Investment’s valuation is its poor Profitability.
- Very high valuation, below market shareholder returns. Current valuation levels are very high relative to the Two Harbors Investment Peer Group. Recent market returns have underperformed the Two Harbors Investment Peer Group. Total shareholder returns expected to significantly beat the overall equity market. Based on current investor expectations, Two Harbors Investment shares should reach a level of $16 by 2029 — an 16.9% per year total shareholder return. A 2029 stock price of $22 would reflect median performance and a price of $25 would be required to reach upper quartile performance.
- Two Harbors Investment’s historical growth is slightly below average. Historical growth has been below average relative to the Two Harbors Investment Peer Group and forecasted growth is relatively high. Equity Growth, and Revenue Growth have lagged. These factors have negatively affected market perceptions of Two Harbors Investment. Two Harbors Investment’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has exceeded equity growth resulting in an improving return on equity.
- Profitability has been Two Harbors Investment’s biggest valuation weakness. Asset Turnover is group leading. Pretax Margin, Pretax ROA, and Return on Equity are group lagging. The company has very high excess cash and will have to work to reinvest at attractive returns to support profitability and valuation.
- Two Harbors Investment’s risk profile is unfavorable. Overall variability has been above average with above average revenue variability, above average E.P.S. variability, and very high stock price volatility. Financial Strength is below average and earnings’ expectations are relatively high. The debt/capital ratio has risen very significantly.
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