Over the past six months, PennyMac Financial Services’s shares (currently trading at $73.11) have posted a disappointing 19.1% loss, well below the S&P 500’s 12.1% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy PennyMac Financial Services, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think PennyMac Financial Services Will Underperform?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons why there are better opportunities than PFSI, plus one 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, investment banking, and trading fees.
PennyMac Financial Services struggled to consistently generate demand over the last five years as its revenue dropped at a 11.8% annual rate. This was below our standards and is a sign of poor business quality.
2. Declining Net Interest Income Reflects Weakness
While banks generate revenue from multiple sources, investors view net interest income as a cornerstone — its predictable, recurring characteristics stand in sharp contrast to the volatility of one-time fees.
PennyMac Financial Services’s net interest income has declined by 27.5% annually over the last five years, much worse than the broader banking industry. This shows that lending underperformed its other business lines.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for PennyMac Financial Services, its EPS declined by 18% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
PennyMac Financial Services falls short of our quality standards. After the recent drawdown, the stock trades at 0.8× forward P/B (or $73.11 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d suggest looking at the most dominant software business in the world.
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