Two Harbors Investment (TWO) Wins Merger Approval, Is The $12 Offer Leaving Much Upside?

Two Harbors Investment (TWO) is back in focus after stockholders approved its merger with CrossCountry Merger Corp, setting up an all cash deal that prices each share at $12.00 plus a stub dividend.

See our latest analysis for Two Harbors Investment.

Over the past year, Two Harbors Investment’s 33.21% total shareholder return and 14.18% year to date share price return suggest momentum has been building. The recent merger approval appears to align current trading around the US$12.08 offer level.

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With Two Harbors Investment now trading close to the US$12.00 cash consideration, the real tension is between taking that merger level or holding out in case pricing drifts away from it as markets reassess value.

Preferred Price-to-Sales of 2.6x: Is it justified?

On current information, Two Harbors Investment screens as good value on some measures, yet looks stretched on others, so it is worth unpacking what the P/S multiple is really telling you.

The preferred metric here is the price-to-sales, or P/S, ratio, which sits at 2.6x for Two Harbors Investment. For a mortgage REIT that invests in mortgage servicing rights and agency RMBS, P/S can be a useful shorthand for how much investors are paying for each dollar of reported revenue when earnings are volatile or currently negative.

Relative to peers, Two Harbors Investment is framed positively on this multiple. The stock is described as good value on a P/S basis compared with both its direct peer group at 3.5x and the broader US Mortgage REITs industry at 4.7x. This implies the market is paying less per dollar of revenue here than across comparable companies. However, this picture shifts when set against the estimated fair P/S ratio of 0.2x, which suggests the current 2.6x level is materially richer than what that fair ratio analysis implies the market could move toward if expectations reset.

Explore the SWS fair ratio for Two Harbors Investment

Result: Price-to-sales of 2.6x (OVERVALUED)

However, investors also need to watch for pressure from declining revenue and ongoing net losses at Two Harbors Investment, which could sharpen scrutiny of that 2.6x P/S multiple.

Find out about the key risks to this Two Harbors Investment narrative.

Another View: SWS DCF Says Two Harbors Investment Is Undervalued

While the 2.6x P/S ratio for Two Harbors Investment looks rich compared with a 0.2x fair ratio, the SWS DCF model points a different way. With the stock at $12.08 and the model indicating future cash flow value of $13.40, this approach frames the shares as undervalued. Which signal carries more weight for you: current revenues or long term cash flows?

Look into how the SWS DCF model arrives at its fair value.

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 44 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

Seeing both risk and reward signals around Two Harbors Investment can be unsettling, so move quickly to review the underlying data and form your own stance using the 2 key rewards and 1 important warning sign.

Looking for more investment ideas beyond Two Harbors Investment?

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• Target potential mispricings by scanning companies that combine quality fundamentals with attractive valuations through the 44 high quality undervalued stocks.
• Build a steadier income stream by reviewing stocks that appear in the 9 dividend fortresses, where yields start at 5% and focus on resilience.
• Prioritize resilience over excitement by filtering companies with lower risk profiles using the 76 resilient stocks with low risk scores.

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.

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