Intrinsic value of Armstrong World Industries - AWI

Previous Close

$46.10

  Intrinsic Value

$19.35

stock screener

  Rating & Target

str. sell

-58%

  Value-price divergence*

-32%

Previous close

$46.10

 
Intrinsic value

$19.35

 
Up/down potential

-58%

 
Rating

str. sell

 
Value-price divergence*

-32%

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

We calculate the intrinsic value of AWI 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 2.6

 

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, %
  0.32
  9.80
  9.32
  8.89
  8.50
  8.15
  7.83
  7.55
  7.30
  7.07
  6.86
  6.67
  6.51
  6.36
  6.22
  6.10
  5.99
  5.89
  5.80
  5.72
  5.65
  5.58
  5.53
  5.47
  5.43
  5.38
  5.34
  5.31
  5.28
  5.25
  5.23
Revenue, $m
  1,235
  1,356
  1,482
  1,614
  1,751
  1,894
  2,042
  2,197
  2,357
  2,524
  2,697
  2,877
  3,064
  3,258
  3,461
  3,672
  3,892
  4,121
  4,360
  4,610
  4,870
  5,142
  5,426
  5,723
  6,034
  6,359
  6,698
  7,054
  7,426
  7,816
  8,225
Variable operating expenses, $m
 
  1,203
  1,315
  1,432
  1,553
  1,680
  1,812
  1,948
  2,091
  2,238
  2,392
  2,552
  2,718
  2,890
  3,070
  3,257
  3,452
  3,656
  3,868
  4,089
  4,320
  4,561
  4,813
  5,076
  5,352
  5,640
  5,941
  6,257
  6,587
  6,933
  7,295
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
  1,050
  1,203
  1,315
  1,432
  1,553
  1,680
  1,812
  1,948
  2,091
  2,238
  2,392
  2,552
  2,718
  2,890
  3,070
  3,257
  3,452
  3,656
  3,868
  4,089
  4,320
  4,561
  4,813
  5,076
  5,352
  5,640
  5,941
  6,257
  6,587
  6,933
  7,295
Operating income, $m
  185
  153
  168
  182
  198
  214
  231
  248
  266
  285
  305
  325
  346
  368
  391
  415
  440
  466
  493
  521
  550
  581
  613
  647
  682
  719
  757
  797
  839
  883
  929
EBITDA, $m
  274
  251
  275
  299
  324
  351
  378
  407
  437
  468
  500
  533
  568
  604
  641
  680
  721
  764
  808
  854
  902
  953
  1,005
  1,060
  1,118
  1,178
  1,241
  1,307
  1,376
  1,448
  1,524
Interest expense (income), $m
  33
  30
  35
  40
  46
  51
  57
  63
  70
  76
  83
  91
  98
  106
  114
  122
  131
  140
  150
  160
  170
  181
  192
  204
  216
  229
  243
  257
  272
  287
  303
Earnings before tax, $m
  144
  124
  133
  142
  152
  163
  174
  185
  197
  209
  221
  235
  248
  262
  277
  293
  309
  325
  343
  361
  380
  400
  421
  443
  465
  489
  514
  540
  567
  596
  626
Tax expense, $m
  50
  33
  36
  38
  41
  44
  47
  50
  53
  56
  60
  63
  67
  71
  75
  79
  83
  88
  93
  98
  103
  108
  114
  120
  126
  132
  139
  146
  153
  161
  169
Net income, $m
  105
  90
  97
  104
  111
  119
  127
  135
  144
  152
  162
  171
  181
  192
  202
  214
  225
  238
  250
  264
  278
  292
  307
  323
  340
  357
  375
  394
  414
  435
  457

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  142
  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
  1,758
  1,878
  2,053
  2,236
  2,426
  2,623
  2,829
  3,043
  3,264
  3,495
  3,735
  3,984
  4,243
  4,513
  4,794
  5,086
  5,391
  5,708
  6,039
  6,385
  6,745
  7,122
  7,516
  7,927
  8,357
  8,807
  9,277
  9,770
  10,286
  10,826
  11,392
Adjusted assets (=assets-cash), $m
  1,616
  1,878
  2,053
  2,236
  2,426
  2,623
  2,829
  3,043
  3,264
  3,495
  3,735
  3,984
  4,243
  4,513
  4,794
  5,086
  5,391
  5,708
  6,039
  6,385
  6,745
  7,122
  7,516
  7,927
  8,357
  8,807
  9,277
  9,770
  10,286
  10,826
  11,392
Revenue / Adjusted assets
  0.764
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
  0.722
Average production assets, $m
  1,099
  1,206
  1,318
  1,435
  1,557
  1,684
  1,816
  1,953
  2,095
  2,243
  2,397
  2,557
  2,724
  2,897
  3,077
  3,265
  3,460
  3,664
  3,876
  4,098
  4,330
  4,571
  4,824
  5,088
  5,364
  5,653
  5,955
  6,271
  6,602
  6,949
  7,312
Working capital, $m
  182
  72
  79
  86
  93
  100
  108
  116
  125
  134
  143
  152
  162
  173
  183
  195
  206
  218
  231
  244
  258
  273
  288
  303
  320
  337
  355
  374
  394
  414
  436
Total debt, $m
  874
  993
  1,144
  1,300
  1,463
  1,633
  1,809
  1,992
  2,183
  2,381
  2,587
  2,800
  3,023
  3,254
  3,495
  3,746
  4,007
  4,280
  4,564
  4,860
  5,170
  5,493
  5,830
  6,183
  6,552
  6,938
  7,342
  7,765
  8,207
  8,671
  9,156
Total liabilities, $m
  1,492
  1,611
  1,762
  1,918
  2,081
  2,251
  2,427
  2,610
  2,801
  2,999
  3,205
  3,418
  3,641
  3,872
  4,113
  4,364
  4,625
  4,898
  5,182
  5,478
  5,788
  6,111
  6,448
  6,801
  7,170
  7,556
  7,960
  8,383
  8,825
  9,289
  9,774
Total equity, $m
  266
  267
  292
  317
  344
  373
  402
  432
  464
  496
  530
  566
  603
  641
  681
  722
  765
  811
  858
  907
  958
  1,011
  1,067
  1,126
  1,187
  1,251
  1,317
  1,387
  1,461
  1,537
  1,618
Total liabilities and equity, $m
  1,758
  1,878
  2,054
  2,235
  2,425
  2,624
  2,829
  3,042
  3,265
  3,495
  3,735
  3,984
  4,244
  4,513
  4,794
  5,086
  5,390
  5,709
  6,040
  6,385
  6,746
  7,122
  7,515
  7,927
  8,357
  8,807
  9,277
  9,770
  10,286
  10,826
  11,392
Debt-to-equity ratio
  3.286
  3.730
  3.920
  4.100
  4.250
  4.380
  4.500
  4.610
  4.710
  4.800
  4.880
  4.950
  5.020
  5.080
  5.130
  5.190
  5.230
  5.280
  5.320
  5.360
  5.400
  5.430
  5.460
  5.490
  5.520
  5.550
  5.570
  5.600
  5.620
  5.640
  5.660
Adjusted equity ratio
  0.077
  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
  105
  90
  97
  104
  111
  119
  127
  135
  144
  152
  162
  171
  181
  192
  202
  214
  225
  238
  250
  264
  278
  292
  307
  323
  340
  357
  375
  394
  414
  435
  457
Depreciation, amort., depletion, $m
  89
  98
  107
  117
  127
  137
  148
  159
  170
  182
  195
  208
  221
  236
  250
  265
  281
  298
  315
  333
  352
  372
  392
  414
  436
  460
  484
  510
  537
  565
  594
Funds from operations, $m
  -143
  188
  204
  221
  238
  256
  274
  294
  314
  335
  357
  379
  403
  427
  453
  479
  507
  535
  565
  597
  630
  664
  699
  737
  776
  817
  859
  904
  951
  1,000
  1,051
Change in working capital, $m
  -192
  6
  7
  7
  7
  8
  8
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
Cash from operations, $m
  49
  182
  197
  214
  231
  248
  267
  286
  305
  326
  347
  370
  393
  417
  442
  468
  495
  523
  553
  584
  616
  649
  684
  721
  759
  799
  841
  885
  931
  979
  1,030
Maintenance CAPEX, $m
  0
  -89
  -98
  -107
  -117
  -127
  -137
  -148
  -159
  -170
  -182
  -195
  -208
  -221
  -236
  -250
  -265
  -281
  -298
  -315
  -333
  -352
  -372
  -392
  -414
  -436
  -460
  -484
  -510
  -537
  -565
New CAPEX, $m
  -104
  -107
  -112
  -117
  -122
  -127
  -132
  -137
  -142
  -148
  -154
  -160
  -166
  -173
  -180
  -188
  -195
  -204
  -213
  -222
  -231
  -242
  -253
  -264
  -276
  -289
  -302
  -316
  -331
  -347
  -363
Cash from investing activities, $m
  -17
  -196
  -210
  -224
  -239
  -254
  -269
  -285
  -301
  -318
  -336
  -355
  -374
  -394
  -416
  -438
  -460
  -485
  -511
  -537
  -564
  -594
  -625
  -656
  -690
  -725
  -762
  -800
  -841
  -884
  -928
Free cash flow, $m
  32
  -15
  -13
  -11
  -8
  -5
  -2
  1
  4
  8
  11
  15
  18
  22
  26
  30
  34
  38
  42
  47
  51
  56
  60
  65
  70
  75
  80
  85
  90
  96
  102
Issuance/(repayment) of debt, $m
  -71
  144
  150
  157
  163
  170
  176
  183
  190
  198
  206
  214
  222
  231
  241
  251
  261
  272
  284
  296
  309
  323
  338
  353
  369
  386
  404
  423
  443
  463
  485
Issuance/(repurchase) of shares, $m
  -43
  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 financing (excl. dividends), $m  
  -129
  144
  150
  157
  163
  170
  176
  183
  190
  198
  206
  214
  222
  231
  241
  251
  261
  272
  284
  296
  309
  323
  338
  353
  369
  386
  404
  423
  443
  463
  485
Total cash flow (excl. dividends), $m
  -103
  130
  137
  146
  155
  164
  174
  184
  195
  205
  217
  229
  241
  254
  267
  281
  295
  311
  327
  343
  361
  379
  398
  418
  439
  461
  484
  508
  533
  559
  587
Retained Cash Flow (-), $m
  503
  -23
  -25
  -26
  -27
  -28
  -29
  -30
  -32
  -33
  -34
  -35
  -37
  -38
  -40
  -42
  -43
  -45
  -47
  -49
  -51
  -53
  -56
  -58
  -61
  -64
  -67
  -70
  -73
  -77
  -80
Prev. year cash balance distribution, $m
 
  23
  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
 
  129
  112
  120
  128
  136
  145
  154
  163
  173
  183
  193
  204
  215
  227
  239
  252
  266
  280
  294
  309
  325
  342
  359
  378
  397
  417
  438
  460
  483
  507
Discount rate, %
 
  8.10
  8.51
  8.93
  9.38
  9.85
  10.34
  10.85
  11.40
  11.97
  12.57
  13.19
  13.85
  14.55
  15.27
  16.04
  16.84
  17.68
  18.57
  19.49
  20.47
  21.49
  22.57
  23.69
  24.88
  26.12
  27.43
  28.80
  30.24
  31.75
  33.34
PV of cash for distribution, $m
 
  120
  95
  93
  89
  85
  80
  75
  69
  62
  56
  49
  43
  37
  31
  26
  21
  17
  13
  10
  7
  5
  4
  3
  2
  1
  1
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Armstrong World Industries, Inc. designs, manufactures, and sells ceiling systems for use primarily in the construction and renovation of residential, commercial, and institutional buildings worldwide. The company produces suspended fiber and metal ceiling systems, and complementary ceiling products, as well as acoustical ceiling, wall, and structural solutions; and sells suspension system products. It sells its commercial ceiling materials and accessories to resale distributors and ceiling system contractors; and residential ceiling products to wholesalers and retailers, including large home centers. The company was incorporated in 1891 and is headquartered in Lancaster, Pennsylvania.

FINANCIAL RATIOS  of  Armstrong World Industries (AWI)

Valuation Ratios
P/E Ratio 23.9
Price to Sales 2
Price to Book 9.4
Price to Tangible Book
Price to Cash Flow 51.2
Price to Free Cash Flow -45.6
Growth Rates
Sales Growth Rate 0.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -39.2%
Cap. Spend. - 3 Yr. Gr. Rate -13.4%
Financial Strength
Quick Ratio 6
Current Ratio 0
LT Debt to Equity 319.2%
Total Debt to Equity 328.6%
Interest Coverage 5
Management Effectiveness
Return On Assets 5.7%
Ret/ On Assets - 3 Yr. Avg. 4.3%
Return On Total Capital 7.2%
Ret/ On T. Cap. - 3 Yr. Avg. 5.5%
Return On Equity 20.3%
Return On Equity - 3 Yr. Avg. 14.4%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 30%
Gross Margin - 3 Yr. Avg. 30.1%
EBITDA Margin 21.5%
EBITDA Margin - 3 Yr. Avg. 21.8%
Operating Margin 15%
Oper. Margin - 3 Yr. Avg. 13.9%
Pre-Tax Margin 11.7%
Pre-Tax Margin - 3 Yr. Avg. 9.9%
Net Profit Margin 8.5%
Net Profit Margin - 3 Yr. Avg. 7%
Effective Tax Rate 34.7%
Eff/ Tax Rate - 3 Yr. Avg. 49.2%
Payout Ratio 0%

AWI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AWI stock intrinsic value calculation we used $1235 million for the last fiscal year's total revenue generated by Armstrong World Industries. The default revenue input number comes from 2016 income statement of Armstrong World Industries. 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 AWI stock valuation model: a) initial revenue growth rate of 9.8% 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 8.1%, whose default value for AWI is calculated based on our internal credit rating of Armstrong World Industries, 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 Armstrong World Industries.
    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 AWI stock the variable cost ratio is equal to 88.7%.

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 AWI 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 Armstrong World Industries.

Corporate tax rate of 27% is the nominal tax rate for Armstrong World Industries. 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 AWI 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 AWI are equal to 88.9%.

Life of production assets of 12.3 years is the average useful life of capital assets used in Armstrong World Industries 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 AWI is equal to 5.3%. 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 - $266 million for Armstrong World Industries - 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 56.628 million for Armstrong World Industries 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 Armstrong World Industries at the current share price and the inputted number of shares is $2.6 billion.

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COMPANY NEWS

▶ Armstrong World Industries posts 2Q profit   [Jul-31-17 10:33PM  Associated Press]
▶ Story Stocks from Briefing.com   [May-01-17 12:04PM  Briefing.com]
▶ Armstrong World Industries posts 1Q profit   [07:14AM  Associated Press]
▶ Armstrong World Industries posts 4Q profit   [07:37AM  Associated Press]
▶ Armstrong World Industries Acquires Tectum, Inc.   [Jan-16-17 07:32AM  GlobeNewswire]
▶ The Top 15 Spin-Offs Of 2016   [Jan-05-17 03:48PM  at Forbes]
▶ 3 Warren Buffett Stocks to Buy in December   [Dec-15-16 08:50AM  at Motley Fool]
▶ Armstrong and Worthington Announce New WAVE President   [Sep-27-16 04:49PM  Marketwired]
Stock chart of AWI Financial statements of AWI
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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