PennyMac Financial Services has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 20% to $116.85 per share while the index has gained 22.9%.
Is there a buying opportunity in PennyMac Financial Services, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is PennyMac Financial Services Not Exciting?
We don't have much confidence in PennyMac Financial Services. Here are three reasons why PFSI doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investing banking, and trading fees.
Over the last five years, PennyMac Financial Services’s demand was weak and its revenue declined by 3.9% per year. This wasn’t a great result and signals it’s a lower quality business.
2. Projected Net Interest Income Growth Is Slim
Forecasted net interest income by Wall Street analysts signals a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect PennyMac Financial Services’s net interest income to drop by 6,753%, a decrease from its 327% annualized declines for the past two years. This projection is below its 327% annualized declines for the past two years.
3. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
PennyMac Financial Services’s flat EPS over the last five years was weak. On the bright side, this performance was better than its 3.9% annualized revenue declines.
Final Judgment
PennyMac Financial Services isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 1.4× forward P/B (or $116.85 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
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