UPDATE: Compass Point Upgrades Hatteras Financial Corp. Following 3Q13 Earnings Report
In a report published Thursday, Compass Point analyst Jason Stewart upgraded the rating on Hatteras Financial Corp. (NYSE: HTS) from Neutral to Buy, and reiterated the $22.00 price target.
In the report, Compass Point noted, “We upgrade our rating on HTS to Buy from Neutral and reiterate our $22 price target following 3Q13 earnings. Overall, 3Q13 earnings were mixed. The decline in book value per share (BVPS) was better than anticipated, but net income came in below estimates due to higher than anticipated net interest margin (NIM) compression QoQ. However, we believe yesterday's 5.8% decline in HTS' share price is an over-reaction and at 89% of 3Q13 BVPS, shares are excessively discounted. In order to reflect the current interest rate environment, management adjusted the balance sheet and reduced its interest rate exposure through sales and purchases of agency securities and Eurodollar future contracts during the quarter. Overall, the majority of the portfolio was unchanged QoQ and continues to be concentrated in Hybrid adjustable rate mortgages (ARMs). While the poor performance in Hybrid ARMs kept us on the sideline last quarter, we expect that most of the limited duration extension embedded in these securities has occurred and thus the worst price action is in the past. With short rates anchored by the Fed, these assets should continue to appreciate as they roll down a historically steep yield curve. Although hybrid ARM CPRs remained elevated during the quarter, they did decline slightly and continued to decline in the month of October. Assuming prepays continue to decline for the remainder of the year, HTS should experience an increase in portfolio yield. Total leverage is back within historical ranges after drifting meaningfully higher in 2Q.”
Hatteras Financial Corp. closed on Wednesday at $17.90.
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