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Repo Rate Volatility to Mar AGNC Investment (AGNC) Q4 Earnings?

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AGNC Investment Corp. (AGNC - Free Report) is scheduled to report fourth-quarter and 2019 results on Jan 29, after the closing bell. The company’s net spread and dollar roll income per common share is expected to have remained flat year over year.

In the last reported quarter, this Bethesda, MD-based mortgage real estate investment trust (REIT), which primarily focuses on leveraged investments in agency mortgage backed securities (MBS), posted net spread and dollar-roll income (excluding estimated catch-up premium amortization benefit) of 59 cents per share, beating the Zacks Consensus Estimate of 48 cents. However, net interest income (NII) of $119 million came in lower than the third-quarter 2018 figure of $188 million.

Over the trailing four quarters, the company met the Zacks Consensus Estimate on one occasion and missed in three others. It delivered an average positive surprise of 0.17% during this period. The graph below depicts this surprise history:

AGNC Investment Corp. Price and EPS Surprise

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

The rapidly-changing interest-rate environment was the key theme dominating the financial markets in 2019. In October, The Federal Open Market Committee (FOMC) slashed the federal-fund rate by 0.25%. This is expected to have resulted in higher mortgage prepayments and refinancing.

This speedy prepayment scenario suggests higher premium amortization expense and elevated levels of conditional prepayment rate (CPR) for AGNC Investment’s agency portfolio, which consists primarily of fixed-rate MBS, in the fourth quarter.

Nonetheless, the company has been increasing holdings of prepay-protected pools and lower coupon TBA and MBS securities, while reducing exposure to generic cohorts with higher prepayment exposure. In third-quarter 2019, it added $13 billion of lower coupon MBS. This specified pool MBS strategy is anticipated to have been a positive in the quarter to be reported, cushioning the company’s portfolio from the negative impact of accelerated prepayments scenario.

The company has been witnessing upward estimate revisions prior to the fourth-quarter earnings release. As such, the Zacks Consensus Estimate of net spread and dollar roll income per common share has been revised marginally upward to 53 cents, over the past month.

Volatility in the repo markets in 2019 escalated funding costs and dampened performance of many industry participants. In fact, in mid-September, the rate on overnight general collateral repo spiked to 10%, about four times more than usual levels, due to shortage of cash available for lending. This prompted the Fed to conduct a series of operations for overnight repurchase agreements, thus injecting significant liquidity to the funding markets.

Amid this turbulence in the money market, the company’s net spread and dollar roll income across most coupons were unusually impacted. This is expected to have significantly thwarted AGNC Investment’s 2019 earnings. In fact, the Zacks Consensus Estimate for full-year 2019 earnings per share is pinned at $2.12, indicating a year-over-year decline of 9.8%. 

Earnings Whispers

Our proven model does not conclusively show that AGNC 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: AGNC Investment’s Earnings ESP is +6.16%.

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Healthpeak Properties, Inc. PEAK, scheduled to release earnings on Feb 11, has an Earnings ESP of +1.54% and carries a Zacks Rank of 3, at present.

Host Hotels & Resorts, Inc. HST, slated to report quarterly figures on Feb 19, has an Earnings ESP of +1.52% and carries a Zacks Rank of 3, currently.

Rexford Industrial Realty REXR, expected to release October-December quarter results around Feb 11, has an Earnings ESP of +4.17% and currently holds a Zacks Rank #3.

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