It's Not Too Late for Great Mortgage Stock Plays: FBR

NEW YORK ( TheStreet) -- Heading into second-quarter earnings season for financial companies, a major theme is the slowdown in mortgage lending, but FBR analyst Paul Miller sees two golden opportunities for investors in the mortgage space.

Miller late on Tuesday initiated his firm's coverage of PennyMac Financial Services ( PFSI) and PennyMac Mortgage Investment Trust ( PMT) with "outperform" ratings.

PennyMac Financial Services is a mortgage lender that also focuses on managing mortgage-related investments. The company was founded in 2008 and went public on May 9, at an opening share price of $18.25. PennyMac's stock closed at $20.72 Wednesday. Miller's price target for the shares is $25, implying 21% upside.

PFSI trades for 6.8 times the consensus 2014 earnings estimate of $3.02 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.12. Miller estimates the company will earn $1.85 a share this year, with earnings rising to $2.85 a share in 2014.

PennyMac Mortgage Investment Trust is a REIT that invests in mortgage loans, including those originated by PFSI, along with distressed loans and mortgage servicing rights. PMT is managed by PFSI, and its loans are serviced by PFSI. PennyMac Mortgage Investment Trust went public in July 2009. PMT closed at $21.27 Wednesday, down 14% this year, following a 70% return during 2012.

PMT trades for 6.8 times the consensus 2014 EPS estimate of $3.14. The consensus 2013 EPS estimate is $3.11. Miller estimates the REIT will earn $2.90 a share this year, with earnings growing slightly to $3.00 a share in 2014.

Based on a quarterly payout of 47 cents, PMT's shares have a dividend yield of 10.72%.

It's no secret that rising long-term rates can hammer dividend stocks, and the market yield on 10-year Treasury bonds rose to 2.70% Wednesday from 1.70% at the end of April.

Two Industry Threats

JPMorgan Chase ( JPM) and Wells Fargo ( WFC) will kick off earnings season for the nation's largest banks on Friday. Both companies are major mortgage lenders, with Wells Fargo currently holding the largest mortgage lending market share.

The consensus among analysts is for Wells Fargo to report second-quarter earnings of 93 cents a share, rising just a penny from the previous quarter. Analysts expect JPMorgan to report second-quarter EPS of $1.44, declining from $1.59 in the first quarter.

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