Intrinsic value of Armour Residential REIT - ARR

Previous Close

$26.31

  Intrinsic Value

$7.41

stock screener

  Rating & Target

str. sell

-72%

  Value-price divergence*

0%

Previous close

$26.31

 
Intrinsic value

$7.41

 
Up/down potential

-72%

 
Rating

str. sell

 
Value-price divergence*

0%

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
  232
  224
  229
  235
  242
  249
  257
  266
  276
  286
  297
  309
  322
  335
  349
  365
  381
  398
  416
  435
  455
  476
  498
  522
  547
  573
  601
  629
  660
  692
Earnings before tax, $m
  -46
  -260
  -253
  -259
  -266
  -274
  -282
  -291
  -301
  -312
  -324
  -337
  -350
  -364
  -380
  -396
  -413
  -431
  -451
  -471
  -493
  -515
  -539
  -565
  -591
  -619
  -649
  -680
  -713
  -748
  -784
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
  -260
  -253
  -259
  -266
  -274
  -282
  -291
  -301
  -312
  -324
  -337
  -350
  -364
  -380
  -396
  -413
  -431
  -451
  -471
  -493
  -515
  -539
  -565
  -591
  -619
  -649
  -680
  -713
  -748
  -784

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
  6,401
  6,550
  6,720
  6,911
  7,123
  7,355
  7,608
  7,881
  8,176
  8,493
  8,831
  9,192
  9,577
  9,985
  10,419
  10,879
  11,365
  11,880
  12,423
  12,997
  13,603
  14,241
  14,915
  15,624
  16,371
  17,158
  17,985
  18,857
  19,773
  20,737
Total liabilities, $m
  6,886
  6,469
  6,618
  6,788
  6,979
  7,191
  7,423
  7,676
  7,949
  8,244
  8,561
  8,899
  9,260
  9,645
  10,053
  10,487
  10,947
  11,433
  11,948
  12,491
  13,065
  13,671
  14,309
  14,983
  15,692
  16,439
  17,226
  18,053
  18,925
  19,841
  20,805
Total equity, $m
  1,092
  1,053
  1,077
  1,105
  1,136
  1,171
  1,208
  1,250
  1,294
  1,342
  1,394
  1,449
  1,507
  1,570
  1,637
  1,707
  1,782
  1,861
  1,945
  2,033
  2,127
  2,225
  2,329
  2,439
  2,555
  2,676
  2,804
  2,939
  3,081
  3,230
  3,387
Total liabilities and equity, $m
  7,978
  7,522
  7,695
  7,893
  8,115
  8,362
  8,631
  8,926
  9,243
  9,586
  9,955
  10,348
  10,767
  11,215
  11,690
  12,194
  12,729
  13,294
  13,893
  14,524
  15,192
  15,896
  16,638
  17,422
  18,247
  19,115
  20,030
  20,992
  22,006
  23,071
  24,192
Debt-to-equity ratio
  6.244
  6.080
  6.080
  6.080
  6.080
  6.080
  6.090
  6.090
  6.090
  6.090
  6.090
  6.100
  6.100
  6.100
  6.100
  6.100
  6.100
  6.110
  6.110
  6.110
  6.110
  6.110
  6.110
  6.110
  6.120
  6.120
  6.120
  6.120
  6.120
  6.120
  6.120
Adjusted equity ratio
  0.142
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140
  0.140

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -46
  -260
  -253
  -259
  -266
  -274
  -282
  -291
  -301
  -312
  -324
  -337
  -350
  -364
  -380
  -396
  -413
  -431
  -451
  -471
  -493
  -515
  -539
  -565
  -591
  -619
  -649
  -680
  -713
  -748
  -784
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
  -260
  -253
  -259
  -266
  -274
  -282
  -291
  -301
  -312
  -324
  -337
  -350
  -364
  -380
  -396
  -413
  -431
  -451
  -471
  -493
  -515
  -539
  -565
  -591
  -619
  -649
  -680
  -713
  -748
  -784
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
  -261
  -254
  -260
  -267
  -275
  -283
  -293
  -303
  -314
  -325
  -338
  -352
  -366
  -382
  -398
  -415
  -434
  -453
  -474
  -495
  -518
  -542
  -568
  -595
  -623
  -653
  -684
  -717
  -752
  -788
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
  -261
  -254
  -260
  -267
  -275
  -283
  -293
  -303
  -314
  -325
  -338
  -352
  -366
  -382
  -398
  -415
  -434
  -453
  -474
  -495
  -518
  -542
  -568
  -595
  -623
  -653
  -684
  -717
  -752
  -788
Issuance/(repayment) of debt, $m
  0
  -219
  149
  170
  191
  212
  232
  253
  274
  295
  316
  338
  361
  385
  409
  434
  460
  486
  514
  544
  574
  606
  639
  673
  709
  747
  787
  828
  871
  917
  964
Issuance/(repurchase) of shares, $m
  -15
  -39
  278
  287
  297
  308
  320
  332
  346
  360
  375
  392
  409
  427
  446
  466
  488
  510
  534
  559
  586
  614
  643
  674
  707
  741
  777
  815
  855
  897
  941
Cash from financing (excl. dividends), $m  
  -5,356
  -258
  427
  457
  488
  520
  552
  585
  620
  655
  691
  730
  770
  812
  855
  900
  948
  996
  1,048
  1,103
  1,160
  1,220
  1,282
  1,347
  1,416
  1,488
  1,564
  1,643
  1,726
  1,814
  1,905
Total cash flow (excl. dividends), $m
  109
  -518
  172
  197
  221
  245
  269
  293
  317
  341
  366
  392
  418
  445
  473
  502
  532
  563
  596
  630
  665
  701
  740
  780
  821
  865
  911
  959
  1,009
  1,061
  1,116
Retained Cash Flow (-), $m
  133
  -221
  -278
  -287
  -297
  -308
  -320
  -332
  -346
  -360
  -375
  -392
  -409
  -427
  -446
  -466
  -488
  -510
  -534
  -559
  -586
  -614
  -643
  -674
  -707
  -741
  -777
  -815
  -855
  -897
  -941
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
 
  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 available for distribution, $m
 
  -221
  -105
  -90
  -76
  -63
  -51
  -40
  -29
  -19
  -9
  0
  9
  18
  27
  36
  44
  53
  61
  70
  79
  87
  96
  105
  115
  124
  134
  144
  154
  165
  176
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
 
  -195
  -80
  -59
  -42
  -29
  -19
  -12
  -7
  -4
  -1
  0
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  77.1
  59.3
  45.5
  34.9
  26.6
  20.3
  15.5
  11.8
  9.0
  6.8
  5.2
  3.9
  3.0
  2.2
  1.7
  1.3
  1.0
  0.7
  0.6
  0.4
  0.3
  0.2
  0.2
  0.1
  0.1
  0.1
  0.1
  0.0
  0.0

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
Price to Sales 16.4
Price to Book 0.9
Price to Tangible Book
Price to Cash Flow -4.8
Price to Free Cash Flow -4.8
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

▶ How these retail investors are playing the market   [Jul-31-17 03:46PM  CNBC Videos]
▶ Armour Residential REIT posts 2Q profit   [Jul-27-17 01:05AM  Associated Press]
▶ 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]
Stock chart of ARR Financial statements 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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