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What's in Store for Two Harbors (TWO) This Earnings Season?

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Two Harbors Investment Corp. (TWO - Free Report) is scheduled to report first-quarter 2019 results on May 7, after market closes. The company’s results will likely reflect year-over-year growth in its net interest income (NII), while core earnings per share are expected to remain flat.

In the last reported quarter, this hybrid mortgage real estate investment trust posted core earnings per share of 49 cents, surpassing the Zacks Consensus Estimate of 47 cents.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate on all four occasions, average beat being 4.20%. The graph below depicts this surprise history:

Two Harbors Investments Corp Price and EPS Surprise

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

Factors to Consider

With strategic acquisitions, Two Harbours has enhanced its portfolio of target assets that includes agency and non-agency investments. In fact, in March, the company issued a public offering of 18 million shares for gross proceeds of $249.3 million. Capital raised is expected to be used for residential mortgage-backed securities (RMBS), mortgage servicing rights (MSR) and other financial assets. With this, the company will likely have enhanced its investment portfolio.

In fact, the strategy of pairing these two instruments offers a competitive edge to the company. Also, for first-quarter 2019, the Zacks Consensus Estimate for the company’s NII is pegged at $99.8 million and suggests 2.4% year-over-year growth.

However, U.S. housing activity was dismal during the March-end quarter. In fact, the first quarter is seasonally slower for housing activity, as compared with the second and third quarters that are key home-buying seasons. This is likely to impact the company’s Agency RMBS portfolio.

In addition, the U.S. treasury yield-curve inversion and weaker U.S. economic fundamentals might act as dampeners for the company in the to-be-reported quarter and drag down Two Harbors’s net interest margin.

In fact, the unfavorable spread differential between the LIBOR rates and repo funding rate will likely affect the company’s performance in the quarter under review. Specifically, higher repo rates and fall in three-month LIBOR have compressed spreads. Hence, the company will no longer enjoy the funding advantage and will witness higher cost of funds. This will subsequently impede the company’s bottom-line growth.

Additionally, the company uses an active risk-management strategy, and uses various hedging tools to reduce the impact of volatility in the interest-rate and mortgage-spread environment. Hence, as the company prioritizes risk management, any robust returns are anticipated to remain elusive.

Lastly, Two Harbors’ activities during the January-March quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for first-quarter FFO remained unchanged at 48 cents in a month’s time.

Earnings Whispers

Our proven model does not conclusively show that Two Harbors Investment is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. 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.

Earning ESP: Two Harbors Investment’s Earnings ESP is -2.08%.

Zacks Rank: The company currently carries a Zacks Rank of 4, which decreases the predictive power of ESP.

It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Several other players in the REIT space are lined up to report their financial results. Below are three stocks, poised to beat on earnings per the proven Zacks model. You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors Real Estate Trust (IRET - Free Report) , scheduled to release earnings on May 8, has an Earnings ESP of +3.19% and currently carries a Zacks Rank of 3.

Park Hotels & Resorts Inc. (PK - Free Report) , slated to report first-quarter results on May 8, has an Earnings ESP of +0.24% and holds a Zacks Rank of 2, at present.

Global Medical REIT Inc. (GMRE - Free Report) , set to report quarterly numbers on May 8, has an Earnings ESP of +1.65% and carries a Zacks Rank of 3, currently.

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