Two Harbors Investment: key metrics behind recent share moves

Two Harbors Investment (TWO) has drawn attention after recent share price moves, prompting investors to look more closely at how its real estate investment trust model and current financial profile line up.

Recent trading has been firm, with a 14.52% 1 month share price return at a last close of $12.62, while the 1 year total shareholder return of 20.39% points to momentum that has been building rather than fading.

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With Two Harbors Investment posting firm recent returns but carrying a loss of US$396.712 million and a value score of 2, are you looking at an underappreciated income play or a stock where markets already price in future growth?

Preferred Price-to-Sales multiple of 2.7x: Is it justified?

On a P/S basis, Two Harbors Investment trades at 2.7x, which lines up below both the US Mortgage REITs industry average of 5.2x and a peer average of 3.6x. This is despite our checks pointing to a richer level, as its estimated fair P/S multiple sits at 0.2x.

The P/S ratio compares the total value the market places on the stock to its revenue, and it is often used for REITs and financials where earnings can be volatile or currently negative. With Two Harbors Investment reporting revenue of $493.78 million and a reported loss of $396.712 million, using sales rather than earnings provides a way to compare what investors are paying for each dollar of revenue.

Here the signals pull in different directions. Relative to peers and the wider Mortgage REITs industry, the 2.7x P/S suggests the stock is priced more conservatively. However, when compared with the estimated fair P/S multiple of 0.2x, the current level looks expensive and indicates a valuation that the market could eventually shift closer to if those relationships hold.

Against the US Mortgage REITs industry average of 5.2x, the current 2.7x P/S implies the stock trades at roughly half the sector level. Compared to the peer average of 3.6x, the discount is also clear. Set against the estimated fair P/S multiple of 0.2x, however, the current valuation looks far richer and highlights a wide gap between where the market prices the stock today and where the fair ratio analysis suggests it could settle over time.

Result: Price-to-sales of 2.7x (OVERVALUED)

However, the sharp annual revenue contraction and the recent net loss of US$396.712 million could challenge the valuation thesis if these trends persist or deepen.

Another angle on value: SWS DCF model

While the P/S comparison presents Two Harbors Investment as expensive relative to its fair ratio, the SWS DCF model points in the same direction. At a last close of $12.62, the stock trades above an estimated future cash flow value of $11.96, which raises the question of how much optimism is already reflected in the price.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Two Harbors Investment for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 48 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With mixed signals across valuation and fundamentals, it makes sense to move quickly and test the numbers against your own expectations using 1 key reward and 1 important warning sign

Looking for more investment ideas?

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• Target dependable cash flows by scanning for higher yielding payers that pass strict checks using the 12 dividend fortresses.
• Hunt for potential value opportunities across the market by filtering for companies that score well on quality and pricing with the 48 high quality undervalued stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.