Featured July 27, 2012

Capstead Mortgage’s higher premium amortization expense contributes to B. Riley downgrade

By Muneeb Pasha

B. Riley analyst Rich Eckert downgraded his opinion of Capstead Mortgage Corp. to "neutral" from "buy."

The analyst pointed to narrowing spreads in the agency MBS market and higher premium amortization expense than he had previously estimated.

These factors will pressure the company's net interest spreads more heavily than the analyst had projected previously, he said in a July 27 note. Further, the stock is trading within 1% of his $14.00 price target and almost in line with the required yield of 10.56%.

The analyst reduced his EPS estimate to between $1.57 and $1.59 from between $1.64 and $1.65 for 2012 and to $1.54 from $1.84 for 2013. The FactSet consensus EPS estimate for both years is $1.67.

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    The analyst remains concerned about prepayment speeds in the near term, but he said that given record low levels of mortgage coupons and delays in implementing HARP 2.0, he believes the increases in longer-term rates that he is forecasting for the second half of 2012 and in 2013 will provide more margin relief than modeled previously.

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