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Should You Buy Rithm Capital (RITM) Ahead of Q1 Earnings?

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Rithm Capital Corp. (RITM - Free Report) is scheduled to report its first-quarter 2024 results on Apr 30, before the opening bell. The company's performance in this period is expected to have benefited from increased interest income and servicing revenues.

The positive factors, along with earnings growth and other favorable conditions, are likely to contribute positively to its price performance. Year to date, Rithm shares have gained 5% against the industry's 3% decline. Also, its forward 12-month price-to-earnings ratio of 6.4X is notably lower than the industry average of 13X, suggesting that the stock is attractively priced for investors.

Now, let’s focus on its first-quarter earnings.

The high interest rate environment is expected to have supported Rithm in generating enhanced returns from specific investments and consumer loans. The Zacks Consensus Estimate for first-quarter interest income reflects impressive 32.3% year-over-year growth. Also, the consensus mark for net servicing revenues implies a 12.5% rise from the prior-year figure.

The Zacks Consensus Estimate for first-quarter earnings per share of 41 cents has witnessed no movement in the past week. The estimated figure projects an increase of 17.1% from the prior-year reported number. Rithm’s earnings beat the consensus estimate in all the prior four quarters, with the average being 52%. This is depicted in the graph below:

Rithm Capital Corp. Price and EPS Surprise

Rithm Capital Corp. Price and EPS Surprise

Rithm Capital Corp. price-eps-surprise | Rithm Capital Corp. Quote

The consensus estimate for the company’s first-quarter revenues is pegged at $1.1 billion, indicating a 38.4% rise from the year-ago reported figure. However, the Zacks Consensus Estimate for net gain on originated residential mortgage loans held for sale indicates a 2.8% year-over-year decline for the first quarter. Also, the higher-than-average inflation level is expected to have led to higher operating expenses for RITM, likely affecting its profits in the quarter under review, making an earnings beat uncertain.

Our proven model does not conclusively predict an earnings beat for Rithm this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat, which is not the case here. The company has an Earnings ESP of -13.58% now. This is because the Most Accurate Estimate currently stands at 35 cents per share, lower than the Zacks Consensus Estimate of 41 cents.

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

Nevertheless, Rithm currently carries a Zacks Rank #2, making it a prudent choice for investors. Despite being uncertain about an earnings beat, investors are considering several other factors for the company, like its focus on diversifying operations, favorable valuation and profit growth potential.

Rithm strategically acquires companies to broaden its capabilities, extend its market reach and diversify its operations. This supports its revenue growth efforts, which continue to benefit from growing fees. Acquiring the asset manager Sculptor and a third-party servicer SLS further highlights its efforts and gives its business profile a rather unique look, more akin to an asset manager than a traditional mortgage REIT.

Investors expect to gain from its portfolio mix, which seems to emphasize consumer loans over legacy CRE assets. The company's growing assets in the single-family residential property business are another positive. Moreover, its prudent risk management practices, including hedges against servicing assets, are expected to maintain stability in its performance. Rithm's fee-based revenue model, prioritizing income generation over risky strategies, further enhances its appeal to shareholders.

To sum up, while RITM may have a lower likelihood of surpassing earnings estimates in the first quarter, its favorable valuation, promising growth prospects, and management's efforts to accelerate its transformation position it as a significant stock to add to your portfolio.

Stocks to Consider

While an earnings beat looks uncertain for Rithm, here are some companies in the broader Finance space that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

CleanSpark, Inc. (CLSK - Free Report) has an Earnings ESP of +63.64% and is a Zacks #2 Ranked player. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for CleanSpark’s bottom line for the to-be-reported quarter is pegged at 6 cents per share, indicating a 126.1% year-over-year improvement. It has remained stable over the past week. The consensus estimate for CLSK’s revenues is pegged at $103.8 million, suggesting a 143.9% increase from a year ago.

Atlanticus Holdings Corporation (ATLC - Free Report) has an Earnings ESP of +21.43% and a Zacks Rank of 3.

The Zacks Consensus Estimate for Atlanticus’ bottom line for the to-be-reported quarter is pegged at 98 cents per share, which remained stable over the past week. ATLC beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 9.7%. The consensus estimate for revenues is pegged at $309.8 million, indicating an 18.7% increase from a year ago.

Houlihan Lokey, Inc. (HLI - Free Report) has an Earnings ESP of +2.37% and a Zacks Rank of 3.

The Zacks Consensus Estimate for Houlihan Lokey’s bottom line for the to-be-reported quarter is pegged at $1.20 per share, indicating 8.1% year-over-year growth. HLI beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 8.3%.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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