Western Asset Mortgage Capital: A Strong Buy

Rising earnings estimates on the back of strong second quarter results – including a 43.8% earnings surprise – helped Western Asset Mortgage Capital Corporation (WMC - Snapshot Report) achieve a Zacks #1 Rank (Strong Buy) on September 15. This real estate investment trust, which mainly invests in Agency residential mortgage-backed securities (RMBS), reported robust results following its initial public offering (IPO) in May.

With a solid return of 19.1% since its debut on the exchange on May 11 and an initial dividend 38 cents per share for the 47-day period ending June 30, 2012, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected second quarter earnings, promising growth prospects, well balanced portfolio and leverage rate are the primary rank drivers for this stock. Moreover, the company possesses upside potential since it is externally managed and advised by Western Asset Management Company, a wholly-owned subsidiary of the reputed Legg Mason Inc. (LM - Analyst Report).

Western Asset Mortgage Capital reported solid second quarter 2012 results on August 13, 2012. The company, which just had 47 days following its IPO in the quarter ended June 30, 2012 with core earnings of $4.8 million or 47 cents per share.

Western Asset Mortgage Capital, through its successfully completed IPO and concurrent private placements, raised more than $200 million in equity. On a GAAP basis, the company reported net income of $4.3 million or 41 cents per share. As of June 30, 2012, net book value was $20.17.

Net interest income for the period was $6.1 million while its annualized net interest spread was 2.66%. Furthermore, Western Asset Mortgage Capital enjoyed 2.45% weighted average net interest spread, including IO securities and swaps.

Repurchase agreements have been entered into by Western Asset Mortgage Capital with nine counterparties, providing in excess of $1.9 billion in available financing. Leverage as of June 30, 2012 stood at 8.3x.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 12.1% to $1.95 per share over the last 60 days. For 2013, the Zacks Consensus Estimate went north by 6.4% to $3.01 per share over the same time frame.

Valuation

Western Asset Mortgage Capital currently trades at a forward P/E of 11.3x, a 16.3% premium to the peer group average of 9.72x. Given the company's strong fundamentals, the premium valuation is justified.

About the Company

Based in Pasadena, California, Western Asset Mortgage Capital Corporation is a REIT which is involved in investing, financing, and managing agency RMBS. Moreover, it invests in commercial mortgage-backed securities. The company has a market capitalization of roughly $228.0 million.