Earnings Preview: American Capital Agency Corp.

American Capital Agency Corp. (AGNC - Analyst Report), a real estate investment trust, is scheduled to report its fiscal 2011 first quarter earnings after the closing bell on April 25, 2011.

The current Zacks Consensus Estimate for the first quarter is $1.36 per share, representing year-over-year growth of about 69.4%.

Fourth Quarter Recap

American Capital reported earnings of $2.50 per share during the fourth quarter 2010, compared to $1.79 in the year-earlier quarter. Excluding one-time items, recurring net income for the reported quarter was $1.26 per share.

For full year 2010, the company reported net income of $7.89 per share, compared to $6.78 in the previous year. Excluding one-time items, recurring net income for fiscal 2010 was $4.50 per share.

The company generated total revenues of $101.0 million during fourth quarter 2010 compared to $41.1 million in the year-ago quarter. For full year 2010, American Capital Agency reported total revenues of $253.1 million compared to $127.9 million.

As of December 31, 2010, the company's book value per share was $24.24, compared to $22.48 at year-end 2009. At year-end 2010, American Capital Agency had cash and cash equivalents of $173.3 million.

Agreement of Analysts

In the last 7 days, no analysts have revised their earnings estimate for the first quarter or for fiscal 2011. In the last 30 days, four out of 15 analysts covering the stock have increased their earnings estimates for the first quarter and two out of the 15 have increased for fiscal 2011. Meanwhile in the last 30 days, one out of the 15 analysts covering the stock revised lower for the first quarter and three out of the 15 have slashed fiscal 2011 estimates.

Magnitude of Estimate Revisions

Taking into account the analysts’ earnings revision, the Zacks Consensus Estimates for the first quarter and fiscal 2011 have remained constant over the last 7 days. However, in the last 30 days the Zacks Consensus Estimate increased by 3 cents to $1.36 per share for first quarter while  it decreased by three cents to $5.31per share  for fiscal 2011.

Our Recommendation

American Capital invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae (FNMA - Snapshot Report), Freddie Mac (FMCC - Analyst Report) and Ginnie Mae (GNMA). Specifically, American Capital invests in FMCC Gold certificates, FNMA certificates, and GNMA certificates. American Capital Agency's securities now have an explicit government guarantee, which makes agency REITs a much more attractive prospect for investors.

However, the residential mortgage market in the U.S. has experienced defaults, credit losses and liquidity concerns in the recent past, which have reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate related assets, including agency securities and other high-quality RMBS (residential mortgage backed securities) assets.

As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance of American Capital in the future.

We currently have a ‘Neutral’ recommendation on American Capital, which presently has a Zacks #3 Rank ('Hold') One of its competitors, MFA Financial, Inc. (MFA - Snapshot Report) also retains a Zacks #3 Rank right now.

Read the full analyst report on AGNC

Read the full analyst report on FMCC

Read the full analyst report on FNMA

Read the full analyst report on MFA