Intrinsic value of Armstrong World Industries - AWI

Previous Close

$58.80

  Intrinsic Value

$18.57

stock screener

  Rating & Target

str. sell

-68%

Previous close

$58.80

 
Intrinsic value

$18.57

 
Up/down potential

-68%

 
Rating

str. sell

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 3.1

 

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
  5.40
  5.36
  5.32
  5.29
  5.26
  5.24
  5.21
  5.19
  5.17
  5.15
  5.14
  5.13
  5.11
  5.10
  5.09
  5.08
  5.07
  5.07
  5.06
  5.05
  5.05
  5.04
  5.04
  5.04
  5.03
  5.03
  5.03
  5.02
  5.02
  5.02
Revenue, $m
  1,235
  1,302
  1,371
  1,444
  1,521
  1,601
  1,685
  1,773
  1,865
  1,961
  2,062
  2,168
  2,279
  2,396
  2,518
  2,646
  2,781
  2,922
  3,070
  3,225
  3,388
  3,559
  3,739
  3,927
  4,125
  4,333
  4,550
  4,779
  5,019
  5,271
  5,536
Variable operating expenses, $m
 
  1,155
  1,216
  1,281
  1,349
  1,420
  1,494
  1,572
  1,654
  1,739
  1,829
  1,923
  2,022
  2,125
  2,233
  2,347
  2,467
  2,592
  2,723
  2,861
  3,005
  3,157
  3,316
  3,483
  3,659
  3,843
  4,036
  4,239
  4,452
  4,676
  4,910
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
  1,155
  1,216
  1,281
  1,349
  1,420
  1,494
  1,572
  1,654
  1,739
  1,829
  1,923
  2,022
  2,125
  2,233
  2,347
  2,467
  2,592
  2,723
  2,861
  3,005
  3,157
  3,316
  3,483
  3,659
  3,843
  4,036
  4,239
  4,452
  4,676
  4,910
Operating income, $m
  185
  147
  155
  163
  172
  181
  190
  200
  211
  222
  233
  245
  258
  271
  285
  299
  314
  330
  347
  364
  383
  402
  422
  444
  466
  490
  514
  540
  567
  596
  626
EBITDA, $m
  274
  241
  254
  268
  282
  297
  312
  328
  345
  363
  382
  402
  422
  444
  467
  490
  515
  541
  569
  598
  628
  659
  693
  728
  764
  803
  843
  885
  930
  977
  1,026
Interest expense (income), $m
  33
  30
  32
  35
  38
  41
  44
  48
  51
  55
  59
  63
  68
  72
  77
  82
  87
  93
  99
  105
  111
  118
  125
  133
  140
  148
  157
  166
  175
  185
  196
Earnings before tax, $m
  144
  117
  123
  128
  134
  140
  146
  152
  159
  166
  174
  182
  190
  198
  207
  217
  227
  237
  248
  260
  272
  284
  297
  311
  326
  341
  357
  374
  392
  410
  430
Tax expense, $m
  50
  32
  33
  35
  36
  38
  39
  41
  43
  45
  47
  49
  51
  54
  56
  59
  61
  64
  67
  70
  73
  77
  80
  84
  88
  92
  96
  101
  106
  111
  116
Net income, $m
  105
  86
  90
  94
  98
  102
  107
  111
  116
  121
  127
  133
  139
  145
  151
  158
  166
  173
  181
  189
  198
  207
  217
  227
  238
  249
  261
  273
  286
  300
  314

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
  1,704
  1,795
  1,891
  1,991
  2,095
  2,205
  2,320
  2,441
  2,567
  2,699
  2,838
  2,983
  3,136
  3,296
  3,464
  3,640
  3,824
  4,018
  4,221
  4,435
  4,659
  4,894
  5,140
  5,399
  5,671
  5,956
  6,255
  6,570
  6,899
  7,246
Adjusted assets (=assets-cash), $m
  1,616
  1,704
  1,795
  1,891
  1,991
  2,095
  2,205
  2,320
  2,441
  2,567
  2,699
  2,838
  2,983
  3,136
  3,296
  3,464
  3,640
  3,824
  4,018
  4,221
  4,435
  4,659
  4,894
  5,140
  5,399
  5,671
  5,956
  6,255
  6,570
  6,899
  7,246
Revenue / Adjusted assets
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
  0.764
Average production assets, $m
  1,099
  1,157
  1,219
  1,284
  1,352
  1,423
  1,498
  1,576
  1,658
  1,743
  1,833
  1,927
  2,026
  2,130
  2,239
  2,353
  2,472
  2,598
  2,729
  2,867
  3,012
  3,164
  3,324
  3,491
  3,667
  3,852
  4,045
  4,249
  4,462
  4,686
  4,921
Working capital, $m
  182
  69
  73
  77
  81
  85
  89
  94
  99
  104
  109
  115
  121
  127
  133
  140
  147
  155
  163
  171
  180
  189
  198
  208
  219
  230
  241
  253
  266
  279
  293
Total debt, $m
  874
  915
  998
  1,084
  1,174
  1,268
  1,367
  1,470
  1,579
  1,692
  1,811
  1,936
  2,067
  2,204
  2,348
  2,499
  2,658
  2,824
  2,998
  3,181
  3,373
  3,575
  3,786
  4,008
  4,241
  4,486
  4,742
  5,012
  5,295
  5,591
  5,903
Total liabilities, $m
  1,492
  1,533
  1,616
  1,702
  1,792
  1,886
  1,985
  2,088
  2,197
  2,310
  2,429
  2,554
  2,685
  2,822
  2,966
  3,117
  3,276
  3,442
  3,616
  3,799
  3,991
  4,193
  4,404
  4,626
  4,859
  5,104
  5,360
  5,630
  5,913
  6,209
  6,521
Total equity, $m
  266
  170
  180
  189
  199
  210
  221
  232
  244
  257
  270
  284
  298
  314
  330
  346
  364
  382
  402
  422
  443
  466
  489
  514
  540
  567
  596
  626
  657
  690
  725
Total liabilities and equity, $m
  1,758
  1,703
  1,796
  1,891
  1,991
  2,096
  2,206
  2,320
  2,441
  2,567
  2,699
  2,838
  2,983
  3,136
  3,296
  3,463
  3,640
  3,824
  4,018
  4,221
  4,434
  4,659
  4,893
  5,140
  5,399
  5,671
  5,956
  6,256
  6,570
  6,899
  7,246
Debt-to-equity ratio
  3.286
  5.370
  5.560
  5.730
  5.900
  6.050
  6.200
  6.340
  6.470
  6.590
  6.710
  6.820
  6.930
  7.030
  7.120
  7.220
  7.300
  7.380
  7.460
  7.540
  7.610
  7.670
  7.740
  7.800
  7.860
  7.910
  7.960
  8.010
  8.060
  8.100
  8.150
Adjusted equity ratio
  0.077
  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
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  105
  86
  90
  94
  98
  102
  107
  111
  116
  121
  127
  133
  139
  145
  151
  158
  166
  173
  181
  189
  198
  207
  217
  227
  238
  249
  261
  273
  286
  300
  314
Depreciation, amort., depletion, $m
  89
  94
  99
  104
  110
  116
  122
  128
  135
  142
  149
  157
  165
  173
  182
  191
  201
  211
  222
  233
  245
  257
  270
  284
  298
  313
  329
  345
  363
  381
  400
Funds from operations, $m
  -143
  180
  189
  198
  208
  218
  228
  239
  251
  263
  276
  289
  303
  318
  333
  350
  367
  384
  403
  423
  443
  465
  487
  511
  536
  562
  590
  618
  649
  681
  714
Change in working capital, $m
  -192
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  10
  11
  12
  12
  13
  13
  14
Cash from operations, $m
  49
  176
  185
  194
  204
  214
  224
  235
  246
  258
  271
  284
  297
  312
  327
  343
  359
  377
  395
  414
  434
  456
  478
  501
  526
  551
  578
  606
  636
  667
  700
Maintenance CAPEX, $m
  0
  -89
  -94
  -99
  -104
  -110
  -116
  -122
  -128
  -135
  -142
  -149
  -157
  -165
  -173
  -182
  -191
  -201
  -211
  -222
  -233
  -245
  -257
  -270
  -284
  -298
  -313
  -329
  -345
  -363
  -381
New CAPEX, $m
  -104
  -59
  -62
  -65
  -68
  -71
  -75
  -78
  -82
  -86
  -90
  -94
  -99
  -104
  -109
  -114
  -120
  -125
  -132
  -138
  -145
  -152
  -160
  -167
  -176
  -185
  -194
  -203
  -213
  -224
  -235
Cash from investing activities, $m
  -17
  -148
  -156
  -164
  -172
  -181
  -191
  -200
  -210
  -221
  -232
  -243
  -256
  -269
  -282
  -296
  -311
  -326
  -343
  -360
  -378
  -397
  -417
  -437
  -460
  -483
  -507
  -532
  -558
  -587
  -616
Free cash flow, $m
  32
  28
  29
  30
  31
  32
  34
  35
  36
  38
  39
  40
  42
  43
  45
  47
  49
  50
  52
  54
  56
  59
  61
  63
  66
  69
  71
  74
  77
  80
  84
Issuance/(repayment) of debt, $m
  -71
  66
  82
  86
  90
  94
  99
  103
  108
  114
  119
  125
  131
  137
  144
  151
  158
  166
  174
  183
  192
  202
  211
  222
  233
  245
  257
  269
  283
  297
  312
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
  66
  82
  86
  90
  94
  99
  103
  108
  114
  119
  125
  131
  137
  144
  151
  158
  166
  174
  183
  192
  202
  211
  222
  233
  245
  257
  269
  283
  297
  312
Total cash flow (excl. dividends), $m
  -103
  95
  111
  116
  121
  127
  132
  138
  145
  151
  158
  165
  173
  181
  189
  198
  207
  217
  227
  237
  248
  260
  272
  285
  299
  313
  328
  344
  360
  377
  395
Retained Cash Flow (-), $m
  503
  -21
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -35
Prev. year cash balance distribution, $m
 
  117
  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
 
  190
  102
  107
  111
  116
  121
  127
  133
  139
  145
  151
  158
  165
  173
  181
  189
  198
  207
  217
  227
  238
  249
  261
  273
  286
  299
  314
  329
  344
  361
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
 
  176
  87
  82
  78
  73
  67
  62
  56
  50
  44
  39
  33
  28
  24
  19
  16
  12
  10
  7
  5
  4
  3
  2
  1
  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. (AWI) is a global producer of ceiling systems. The Company owns and operates the Building Products (Ceilings) segment. The Company designs, manufactures and sells ceiling systems (primarily mineral fiber, fiberglass wool and metal) around the world. Its products are used in commercial and institutional buildings. Its geographical segments include Americas (including Canada); Europe, Middle East and Africa (including Russia) (EMEA), and Pacific Rim. As of December 31, 2016, it had 15 manufacturing plants in eight countries, including six plants located throughout the United States. Its Americas segment sells products for use in single and multi-family housing. It sells commercial products to building materials distributors re-selling its products to contractors, subcontractors' alliances, architect and design firms, and facility owners. Residential ceiling products are sold in the Americas primarily to wholesalers and retailers.

FINANCIAL RATIOS  of  Armstrong World Industries (AWI)

Valuation Ratios
P/E Ratio 30.5
Price to Sales 2.6
Price to Book 12
Price to Tangible Book
Price to Cash Flow 65.3
Price to Free Cash Flow -58.2
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 5.4% 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 52.848 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 $3.1 billion.

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COMPANY NEWS

▶ What Happened in the Stock Market Today   [Nov-20-17 05:04PM  Motley Fool]
▶ Armstrong World Industries posts 3Q profit   [Oct-30-17 07:32AM  Associated Press]
▶ How to Trade 4 Home Repair Stocks   [Oct-09-17 04:25PM  Investopedia]
▶ 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]
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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