CIM -- Taking a look under the hood ….

CIM released their first ever quarterly earnings report a few days ago. It appears that things are moving along and the company is ramping up its portfolio.

The key number from this report is the average spread on assets which is currently 134 bps annualized Here are my ballpark estimates of what earnings power for CIM will be over the next 12 months:

Book Value $539M
Earning Assets @ 8x - 10x leverage -- $4.85B to $5.93B
(book value * leverage factor + book value)
Spread on Assets -- 130 bps
Net Interest Income -- $63M to $77M
Base Management Fee -- $9.4M (book value * 1.75%)
Incentive Fee* -- $7 to $9.8M (assume 3% LIBOR)
Core Earnings -- $47 to $58M
Estimated EPS -- $1.24 to $1.54
Yield at current price of $19 -- 6.5% to 8.1%

*The incentive fee is even more of a moving target than net income estimates because it depends on net income and LIBOR which constantly changes.

Currently, CIM’s portfolio is almost entirely AAA rated mortgage backed securities and they are still building out the portion of their portfolio that will be in the form of securities. The next step will be to build the portfolio of the portfolio consisting of actual loans. The yield on raw loans should be higher and should help push the spread beyond 130 bps.

What is a realistic estimate for Core Earnings going forward?

I think looking at NLY is the first step in answering that question. NLY also reported earnings a few days ago and ended the quarter with spread of 99 bps. NLY is currently priced for that spread to increase.

I think its safe to assume that CIM will earn a higher spread than NLY, they already do. At a spread of 150 bps I get a current yield of 7.5% to 9.5% (P/E of 10x-13x). At 200 bps spread which is not unreasonable I get a yield of 10%-13% (P/E of 8x-10x).

I think at current levels CIM represents an attractive opportunity to earn a decent return on investment. If the stock were to sell off closer to book value of $14.26 the stock would become even more attractive.

I initiated a ½ percent position in the “Best Ideas” portfolio, and I will be raising this position to 2% after this earnings report.

* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.