Intrinsic value of Armstrong World Industries - AWI

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*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 2.5

 

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
  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
  1,235
  1,260
  1,289
  1,322
  1,359
  1,400
  1,445
  1,495
  1,548
  1,605
  1,667
  1,733
  1,803
  1,878
  1,958
  2,042
  2,132
  2,226
  2,326
  2,432
  2,544
  2,662
  2,786
  2,917
  3,056
  3,201
  3,354
  3,515
  3,685
  3,863
  4,051
Variable operating expenses, $m
 
  1,117
  1,143
  1,172
  1,205
  1,242
  1,282
  1,326
  1,373
  1,424
  1,479
  1,537
  1,599
  1,666
  1,736
  1,811
  1,891
  1,975
  2,064
  2,157
  2,257
  2,361
  2,471
  2,588
  2,710
  2,839
  2,975
  3,118
  3,269
  3,427
  3,593
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
  1,117
  1,143
  1,172
  1,205
  1,242
  1,282
  1,326
  1,373
  1,424
  1,479
  1,537
  1,599
  1,666
  1,736
  1,811
  1,891
  1,975
  2,064
  2,157
  2,257
  2,361
  2,471
  2,588
  2,710
  2,839
  2,975
  3,118
  3,269
  3,427
  3,593
Operating income, $m
  185
  142
  146
  149
  154
  158
  163
  169
  175
  181
  188
  196
  204
  212
  221
  231
  241
  252
  263
  275
  287
  301
  315
  330
  345
  362
  379
  397
  416
  437
  458
EBITDA, $m
  274
  232
  237
  243
  250
  258
  266
  275
  285
  296
  307
  319
  332
  346
  361
  376
  393
  410
  429
  448
  469
  490
  513
  537
  563
  590
  618
  648
  679
  712
  746
Interest expense (income), $m
  33
  30
  30
  32
  33
  34
  36
  38
  40
  42
  45
  47
  50
  53
  56
  59
  63
  66
  70
  74
  79
  83
  88
  93
  99
  104
  110
  117
  123
  130
  138
Earnings before tax, $m
  144
  113
  115
  118
  121
  124
  127
  131
  135
  139
  144
  149
  154
  160
  165
  172
  178
  185
  193
  201
  209
  218
  227
  236
  247
  257
  269
  281
  293
  306
  320
Tax expense, $m
  50
  30
  31
  32
  33
  33
  34
  35
  36
  38
  39
  40
  42
  43
  45
  46
  48
  50
  52
  54
  56
  59
  61
  64
  67
  69
  73
  76
  79
  83
  86
Net income, $m
  105
  82
  84
  86
  88
  90
  93
  96
  98
  102
  105
  109
  112
  116
  121
  125
  130
  135
  141
  146
  152
  159
  166
  173
  180
  188
  196
  205
  214
  224
  234

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
  1,649
  1,687
  1,730
  1,779
  1,833
  1,892
  1,956
  2,026
  2,101
  2,182
  2,268
  2,360
  2,458
  2,562
  2,673
  2,790
  2,914
  3,045
  3,184
  3,330
  3,484
  3,647
  3,819
  3,999
  4,190
  4,390
  4,601
  4,823
  5,057
  5,303
Adjusted assets (=assets-cash), $m
  1,616
  1,649
  1,687
  1,730
  1,779
  1,833
  1,892
  1,956
  2,026
  2,101
  2,182
  2,268
  2,360
  2,458
  2,562
  2,673
  2,790
  2,914
  3,045
  3,184
  3,330
  3,484
  3,647
  3,819
  3,999
  4,190
  4,390
  4,601
  4,823
  5,057
  5,303
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
  448
  459
  471
  484
  498
  515
  532
  551
  571
  593
  617
  642
  669
  697
  727
  759
  793
  828
  866
  906
  948
  992
  1,039
  1,088
  1,140
  1,194
  1,251
  1,312
  1,375
  1,442
Working capital, $m
  182
  67
  68
  70
  72
  74
  77
  79
  82
  85
  88
  92
  96
  100
  104
  108
  113
  118
  123
  129
  135
  141
  148
  155
  162
  170
  178
  186
  195
  205
  215
Total debt, $m
  874
  866
  900
  939
  983
  1,031
  1,085
  1,143
  1,205
  1,273
  1,346
  1,423
  1,506
  1,594
  1,688
  1,788
  1,893
  2,005
  2,123
  2,247
  2,379
  2,518
  2,664
  2,819
  2,981
  3,153
  3,333
  3,523
  3,723
  3,933
  4,154
Total liabilities, $m
  1,492
  1,484
  1,518
  1,557
  1,601
  1,649
  1,703
  1,761
  1,823
  1,891
  1,964
  2,041
  2,124
  2,212
  2,306
  2,406
  2,511
  2,623
  2,741
  2,865
  2,997
  3,136
  3,282
  3,437
  3,599
  3,771
  3,951
  4,141
  4,341
  4,551
  4,772
Total equity, $m
  266
  165
  169
  173
  178
  183
  189
  196
  203
  210
  218
  227
  236
  246
  256
  267
  279
  291
  305
  318
  333
  348
  365
  382
  400
  419
  439
  460
  482
  506
  530
Total liabilities and equity, $m
  1,758
  1,649
  1,687
  1,730
  1,779
  1,832
  1,892
  1,957
  2,026
  2,101
  2,182
  2,268
  2,360
  2,458
  2,562
  2,673
  2,790
  2,914
  3,046
  3,183
  3,330
  3,484
  3,647
  3,819
  3,999
  4,190
  4,390
  4,601
  4,823
  5,057
  5,302
Debt-to-equity ratio
  3.286
  5.250
  5.340
  5.430
  5.530
  5.630
  5.730
  5.840
  5.950
  6.060
  6.170
  6.280
  6.380
  6.490
  6.590
  6.690
  6.780
  6.880
  6.970
  7.060
  7.140
  7.230
  7.310
  7.380
  7.450
  7.520
  7.590
  7.660
  7.720
  7.780
  7.830
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
  82
  84
  86
  88
  90
  93
  96
  98
  102
  105
  109
  112
  116
  121
  125
  130
  135
  141
  146
  152
  159
  166
  173
  180
  188
  196
  205
  214
  224
  234
Depreciation, amort., depletion, $m
  89
  90
  92
  94
  97
  100
  103
  106
  110
  114
  119
  123
  128
  134
  139
  145
  152
  159
  166
  173
  181
  190
  198
  208
  218
  228
  239
  250
  262
  275
  288
Funds from operations, $m
  -143
  172
  176
  180
  185
  190
  196
  202
  209
  216
  224
  232
  241
  250
  260
  271
  282
  294
  306
  320
  334
  348
  364
  380
  398
  416
  435
  455
  476
  499
  522
Change in working capital, $m
  -192
  1
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  9
  10
Cash from operations, $m
  49
  164
  174
  178
  183
  188
  193
  199
  206
  213
  220
  228
  237
  246
  256
  266
  277
  289
  301
  314
  328
  342
  357
  373
  390
  408
  427
  447
  467
  489
  512
Maintenance CAPEX, $m
  0
  -88
  -90
  -92
  -94
  -97
  -100
  -103
  -106
  -110
  -114
  -119
  -123
  -128
  -134
  -139
  -145
  -152
  -159
  -166
  -173
  -181
  -190
  -198
  -208
  -218
  -228
  -239
  -250
  -262
  -275
New CAPEX, $m
  -104
  -8
  -10
  -12
  -13
  -15
  -16
  -18
  -19
  -20
  -22
  -23
  -25
  -27
  -28
  -30
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -55
  -57
  -60
  -64
  -67
Cash from investing activities, $m
  -17
  -96
  -100
  -104
  -107
  -112
  -116
  -121
  -125
  -130
  -136
  -142
  -148
  -155
  -162
  -169
  -177
  -186
  -195
  -204
  -213
  -223
  -234
  -245
  -257
  -270
  -283
  -296
  -310
  -326
  -342
Free cash flow, $m
  32
  67
  74
  75
  76
  76
  78
  79
  80
  82
  84
  86
  89
  91
  94
  97
  100
  103
  107
  111
  115
  119
  124
  128
  133
  139
  144
  150
  157
  163
  170
Issuance/(repayment) of debt, $m
  -71
  17
  34
  39
  44
  49
  53
  58
  63
  68
  73
  78
  83
  88
  94
  99
  105
  112
  118
  125
  132
  139
  146
  154
  163
  171
  180
  190
  200
  210
  221
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
  17
  34
  39
  44
  49
  53
  58
  63
  68
  73
  78
  83
  88
  94
  99
  105
  112
  118
  125
  132
  139
  146
  154
  163
  171
  180
  190
  200
  210
  221
Total cash flow (excl. dividends), $m
  -103
  84
  109
  114
  119
  125
  131
  137
  143
  150
  157
  164
  171
  179
  188
  196
  205
  215
  225
  235
  246
  258
  270
  283
  296
  310
  325
  340
  356
  374
  391
Retained Cash Flow (-), $m
  503
  -16
  -4
  -4
  -5
  -5
  -6
  -6
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -25
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
 
  185
  105
  110
  114
  120
  125
  130
  136
  142
  149
  155
  162
  170
  177
  185
  194
  202
  212
  221
  232
  242
  254
  266
  278
  291
  305
  319
  334
  350
  367
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
 
  171
  89
  85
  80
  75
  69
  63
  57
  51
  46
  40
  34
  29
  24
  20
  16
  13
  10
  8
  6
  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. 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 23.3
Price to Sales 2
Price to Book 9.2
Price to Tangible Book
Price to Cash Flow 50
Price to Free Cash Flow -44.5
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 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 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 35.6%.

Life of production assets of 4.9 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 $2.5 billion.


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COMPANY NEWS

▶ 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 Annual reports 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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