Nomura Discusses Little-Known 'Critical' Metric To Watch After American Capital Agency Earnings Beat

In a report issued Wednesday morning, Nomura analyst Brock Vandervliet took a look at American Capital Agency Corp. (NASDAQ: AGNC) following its recent earnings beat. The firm issued a Neutral rating and a $21 price target for the stock.

Rather than using GAAP EPS, Nomura employs a company-supplied non-GAAP metric called, “Net Spread & Dollar Roll EPS.”

“On this basis, AGNC came in well above our $0.81 estimate at $0.92. The main driver for the higher EPS was dollar roll income of $167mn (up $15mn from Q3’14), which was $23mn above our forecast,” the report said.

The EPS beat came in spite of a lower-than-expected net interest income of $250 million (about $6 million below the firm’s forecast) “due to a lower net interest spread. Dollar roll is an ongoing concern and one the Street is likely to focus more on with every passing quarter. Its performance was well above our estimate and drove the EPS beat. Based on our understanding of dollar roll dynamics more recently, we may have been a quarter premature with respect to forecasting a decline in dollar roll. Given the magnitude of dollar roll earnings as a fraction of total earnings, this remains a critical variable.”

Shares traded recently at $21.38, down 1.6 percent.