Intrinsic value of Armour Residential REIT - ARR

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$27.31

  Intrinsic Value

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  Value-price divergence*

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$27.31

 
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Our model is not good at valuating stocks of financial companies, such as ARR.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ARR stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -9.23
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  59
  60
  62
  63
  65
  67
  69
  71
  74
  77
  80
  83
  86
  90
  94
  98
  102
  106
  111
  116
  122
  127
  133
  139
  146
  153
  160
  168
  176
  185
  194
Variable operating expenses, $m
 
  89
  91
  93
  96
  99
  102
  105
  109
  113
  117
  122
  127
  132
  138
  144
  150
  157
  164
  171
  179
  188
  196
  206
  215
  226
  236
  248
  260
  272
  285
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  104
  89
  91
  93
  96
  99
  102
  105
  109
  113
  117
  122
  127
  132
  138
  144
  150
  157
  164
  171
  179
  188
  196
  206
  215
  226
  236
  248
  260
  272
  285
Operating income, $m
  -46
  -29
  -29
  -30
  -31
  -32
  -33
  -34
  -35
  -36
  -38
  -39
  -41
  -43
  -44
  -46
  -48
  -51
  -53
  -55
  -58
  -60
  -63
  -66
  -69
  -73
  -76
  -80
  -84
  -88
  -92
EBITDA, $m
  -46
  -29
  -29
  -30
  -31
  -32
  -33
  -34
  -35
  -36
  -38
  -39
  -41
  -43
  -44
  -46
  -48
  -51
  -53
  -55
  -58
  -60
  -63
  -66
  -69
  -73
  -76
  -80
  -84
  -88
  -92
Interest expense (income), $m
  194
  229
  224
  229
  235
  241
  249
  257
  266
  275
  285
  297
  308
  321
  334
  349
  364
  380
  397
  415
  434
  454
  475
  497
  521
  546
  572
  599
  628
  658
  690
Earnings before tax, $m
  -46
  -258
  -253
  -259
  -265
  -273
  -282
  -291
  -301
  -312
  -323
  -336
  -349
  -364
  -379
  -395
  -412
  -430
  -450
  -470
  -492
  -514
  -538
  -563
  -590
  -618
  -648
  -679
  -712
  -746
  -782
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -46
  -258
  -253
  -259
  -265
  -273
  -282
  -291
  -301
  -312
  -323
  -336
  -349
  -364
  -379
  -395
  -412
  -430
  -450
  -470
  -492
  -514
  -538
  -563
  -590
  -618
  -648
  -679
  -712
  -746
  -782

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  272
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  7,978
  7,523
  7,696
  7,893
  8,115
  8,361
  8,631
  8,925
  9,243
  9,586
  9,954
  10,348
  10,768
  11,215
  11,690
  12,194
  12,729
  13,294
  13,893
  14,525
  15,192
  15,896
  16,639
  17,422
  18,246
  19,115
  20,030
  20,992
  22,005
  23,071
  24,192
Adjusted assets (=assets-cash), $m
  7,706
  7,523
  7,696
  7,893
  8,115
  8,361
  8,631
  8,925
  9,243
  9,586
  9,954
  10,348
  10,768
  11,215
  11,690
  12,194
  12,729
  13,294
  13,893
  14,525
  15,192
  15,896
  16,639
  17,422
  18,246
  19,115
  20,030
  20,992
  22,005
  23,071
  24,192
Revenue / Adjusted assets
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
  0.008
Average production assets, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Working capital, $m
  0
  30
  31
  32
  32
  33
  35
  36
  37
  38
  40
  41
  43
  45
  47
  49
  51
  53
  56
  58
  61
  64
  67
  70
  73
  76
  80
  84
  88
  92
  97
Total debt, $m
  6,818
  6,386
  6,535
  6,704
  6,895
  7,106
  7,338
  7,590
  7,863
  8,157
  8,473
  8,810
  9,171
  9,554
  9,962
  10,395
  10,853
  11,339
  11,852
  12,394
  12,967
  13,571
  14,208
  14,880
  15,587
  16,333
  17,118
  17,943
  18,813
  19,727
  20,689
Total liabilities, $m
  6,886
  6,454
  6,603
  6,772
  6,963
  7,174
  7,406
  7,658
  7,931
  8,225
  8,541
  8,878
  9,239
  9,622
  10,030
  10,463
  10,921
  11,407
  11,920
  12,462
  13,035
  13,639
  14,276
  14,948
  15,655
  16,401
  17,186
  18,011
  18,881
  19,795
  20,757
Total equity, $m
  1,092
  1,068
  1,093
  1,121
  1,152
  1,187
  1,226
  1,267
  1,313
  1,361
  1,413
  1,469
  1,529
  1,593
  1,660
  1,732
  1,807
  1,888
  1,973
  2,063
  2,157
  2,257
  2,363
  2,474
  2,591
  2,714
  2,844
  2,981
  3,125
  3,276
  3,435
Total liabilities and equity, $m
  7,978
  7,522
  7,696
  7,893
  8,115
  8,361
  8,632
  8,925
  9,244
  9,586
  9,954
  10,347
  10,768
  11,215
  11,690
  12,195
  12,728
  13,295
  13,893
  14,525
  15,192
  15,896
  16,639
  17,422
  18,246
  19,115
  20,030
  20,992
  22,006
  23,071
  24,192
Debt-to-equity ratio
  6.244
  5.980
  5.980
  5.980
  5.980
  5.980
  5.990
  5.990
  5.990
  5.990
  5.990
  6.000
  6.000
  6.000
  6.000
  6.000
  6.000
  6.010
  6.010
  6.010
  6.010
  6.010
  6.010
  6.010
  6.020
  6.020
  6.020
  6.020
  6.020
  6.020
  6.020
Adjusted equity ratio
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142
  0.142

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -46
  -258
  -253
  -259
  -265
  -273
  -282
  -291
  -301
  -312
  -323
  -336
  -349
  -364
  -379
  -395
  -412
  -430
  -450
  -470
  -492
  -514
  -538
  -563
  -590
  -618
  -648
  -679
  -712
  -746
  -782
Depreciation, amort., depletion, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Funds from operations, $m
  -188
  -258
  -253
  -259
  -265
  -273
  -282
  -291
  -301
  -312
  -323
  -336
  -349
  -364
  -379
  -395
  -412
  -430
  -450
  -470
  -492
  -514
  -538
  -563
  -590
  -618
  -648
  -679
  -712
  -746
  -782
Change in working capital, $m
  15
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
Cash from operations, $m
  -203
  -258
  -253
  -260
  -266
  -274
  -283
  -292
  -302
  -313
  -325
  -337
  -351
  -365
  -381
  -397
  -414
  -433
  -452
  -473
  -494
  -517
  -541
  -567
  -593
  -622
  -651
  -683
  -716
  -750
  -787
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
New CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from investing activities, $m
  5,668
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Free cash flow, $m
  5,465
  -258
  -253
  -260
  -266
  -274
  -283
  -292
  -302
  -313
  -325
  -337
  -351
  -365
  -381
  -397
  -414
  -433
  -452
  -473
  -494
  -517
  -541
  -567
  -593
  -622
  -651
  -683
  -716
  -750
  -787
Issuance/(repayment) of debt, $m
  0
  -160
  148
  170
  191
  211
  232
  252
  273
  294
  316
  338
  360
  384
  408
  433
  459
  485
  513
  542
  573
  604
  637
  672
  708
  745
  785
  826
  869
  914
  962
Issuance/(repurchase) of shares, $m
  -15
  -24
  130
  118
  107
  98
  89
  81
  74
  68
  61
  56
  50
  45
  40
  36
  32
  28
  24
  20
  16
  13
  9
  6
  3
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -5,356
  -184
  278
  288
  298
  309
  321
  333
  347
  362
  377
  394
  410
  429
  448
  469
  491
  513
  537
  562
  589
  617
  646
  678
  711
  745
  785
  826
  869
  914
  962
Total cash flow (excl. dividends), $m
  109
  -418
  -105
  -90
  -76
  -63
  -51
  -40
  -29
  -19
  -9
  0
  9
  18
  27
  36
  44
  53
  61
  70
  78
  87
  96
  105
  114
  124
  133
  143
  153
  164
  175
Retained Cash Flow (-), $m
  133
  24
  -25
  -28
  -32
  -35
  -38
  -42
  -45
  -49
  -52
  -56
  -60
  -63
  -67
  -72
  -76
  -80
  -85
  -90
  -95
  -100
  -105
  -111
  -117
  -123
  -130
  -137
  -144
  -151
  -159
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  -394
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  3
  7
  10
  13
  16
Discount rate, %
 
  13.70
  14.39
  15.10
  15.86
  16.65
  17.49
  18.36
  19.28
  20.24
  21.25
  22.32
  23.43
  24.60
  25.83
  27.13
  28.48
  29.91
  31.40
  32.97
  34.62
  36.35
  38.17
  40.08
  42.08
  44.18
  46.39
  48.71
  51.15
  53.71
  56.39
PV of cash for distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  88.4
  79.1
  71.6
  65.6
  60.6
  56.6
  53.2
  50.4
  48.0
  46.0
  44.4
  43.0
  41.9
  40.9
  40.1
  39.4
  38.9
  38.5
  38.2
  37.9
  37.7
  37.6
  37.6
  37.6
  37.6
  37.6
  37.6
  37.6
  37.6

ARMOUR Residential REIT, Inc. invests in residential mortgage backed securities in the United States. The company is managed by ARMOUR Capital Management LP. It invests primarily in fixed rate residential, adjustable rate, and hybrid adjustable rate residential mortgage-backed securities issued or guaranteed by the United States Government-sponsored enterprises (GSEs), or guaranteed by the Government National Mortgage Association. The company also invests in other securities backed by residential mortgages for which the payment of principal and interest is not guaranteed by a GSE or government agency. The company has elected to be taxed as a real estate investment trust under the Internal Revenue Code. As a result, it would not be subject to corporate income tax on that portion of its net income that is distributed to shareholders. The company was founded in 2008 and is based in Vero Beach, Florida.

FINANCIAL RATIOS  of  Armour Residential REIT (ARR)

Valuation Ratios
P/E Ratio -21.8
Price to Sales 17
Price to Book 0.9
Price to Tangible Book
Price to Cash Flow -4.9
Price to Free Cash Flow -4.9
Growth Rates
Sales Growth Rate -9.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate NaN%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 0%
Total Debt to Equity 624.4%
Interest Coverage 1
Management Effectiveness
Return On Assets 1.4%
Ret/ On Assets - 3 Yr. Avg. 1%
Return On Total Capital -0.4%
Ret/ On T. Cap. - 3 Yr. Avg. -0.6%
Return On Equity -4%
Return On Equity - 3 Yr. Avg. -5.3%
Asset Turnover 0
Profitability Ratios
Gross Margin -25.4%
Gross Margin - 3 Yr. Avg. 56.4%
EBITDA Margin 250.8%
EBITDA Margin - 3 Yr. Avg. 163.8%
Operating Margin -76.3%
Oper. Margin - 3 Yr. Avg. 37.2%
Pre-Tax Margin -78%
Pre-Tax Margin - 3 Yr. Avg. 36.6%
Net Profit Margin -78%
Net Profit Margin - 3 Yr. Avg. 36.6%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio -276.1%

ARR stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ARR stock intrinsic value calculation we used $59 million for the last fiscal year's total revenue generated by Armour Residential REIT. The default revenue input number comes from 2016 income statement of Armour Residential REIT. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ARR stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 13.7%, whose default value for ARR is calculated based on our internal credit rating of Armour Residential REIT, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Armour Residential REIT.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ARR stock the variable cost ratio is equal to 147.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ARR stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Armour Residential REIT.

Corporate tax rate of 27% is the nominal tax rate for Armour Residential REIT. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ARR stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ARR are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in Armour Residential REIT operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ARR is equal to 50%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1092 million for Armour Residential REIT - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 36.822 million for Armour Residential REIT is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Armour Residential REIT at the current share price and the inputted number of shares is $1.0 billion.


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COMPANY NEWS

▶ Armour Residential REIT posts 1Q profit   [May-01-17 05:50PM  Associated Press]
▶ Armour Residential REIT posts 4Q profit   [Feb-15-17 05:32PM  Associated Press]
▶ Co-CEOs at Armour Residential Buy Company Stock   [Jan-02-17 02:53AM  GuruFocus.com]
▶ 7 Good Stocks Paying Dividends Every Month   [Aug-19-16 09:20AM  at Kiplinger]
▶ ARMOUR Completes $85.2 Million Cash Acquisition of Javelin   [Apr-06-16 04:45PM  GlobeNewswire]
Stock chart of ARR Financial statements of ARR Annual reports of ARR
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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