Intrinsic value of Ellington Residential Mortgage REIT - EARN

Previous Close

$14.61

  Intrinsic Value

$62.95

stock screener

  Rating & Target

str. buy

+331%

  Value-price divergence*

0%

Previous close

$14.61

 
Intrinsic value

$62.95

 
Up/down potential

+331%

 
Rating

str. buy

 
Value-price divergence*

0%

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

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

We calculate the intrinsic value of EARN 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 0.1

 

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, %
  -17.07
  20.00
  18.50
  17.15
  15.94
  14.84
  13.86
  12.97
  12.17
  11.46
  10.81
  10.23
  9.71
  9.24
  8.81
  8.43
  8.09
  7.78
  7.50
  7.25
  7.03
  6.82
  6.64
  6.48
  6.33
  6.20
  6.08
  5.97
  5.87
  5.79
  5.71
Revenue, $m
  34
  41
  48
  57
  66
  75
  86
  97
  109
  121
  134
  148
  163
  178
  193
  209
  226
  244
  262
  281
  301
  322
  343
  365
  388
  412
  437
  464
  491
  519
  549
Variable operating expenses, $m
 
  11
  13
  15
  17
  20
  23
  26
  29
  32
  36
  39
  43
  47
  51
  56
  60
  65
  70
  75
  80
  85
  91
  97
  103
  109
  116
  123
  130
  138
  145
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
  14
  11
  13
  15
  17
  20
  23
  26
  29
  32
  36
  39
  43
  47
  51
  56
  60
  65
  70
  75
  80
  85
  91
  97
  103
  109
  116
  123
  130
  138
  145
Operating income, $m
  19
  30
  36
  42
  48
  55
  63
  71
  80
  89
  99
  109
  119
  130
  142
  154
  166
  179
  193
  207
  221
  236
  252
  268
  285
  303
  322
  341
  361
  382
  403
EBITDA, $m
  19
  30
  36
  42
  48
  55
  63
  71
  80
  89
  99
  109
  119
  130
  142
  154
  166
  179
  193
  207
  221
  236
  252
  268
  285
  303
  322
  341
  361
  382
  403
Interest expense (income), $m
  9
  41
  50
  60
  71
  83
  96
  109
  124
  139
  156
  173
  191
  210
  229
  250
  271
  293
  316
  340
  365
  391
  418
  446
  475
  505
  537
  570
  604
  640
  677
Earnings before tax, $m
  12
  -11
  -15
  -19
  -23
  -27
  -33
  -38
  -44
  -50
  -57
  -64
  -71
  -79
  -87
  -96
  -105
  -114
  -124
  -134
  -144
  -155
  -166
  -178
  -190
  -202
  -215
  -229
  -243
  -258
  -273
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
  12
  -11
  -15
  -19
  -23
  -27
  -33
  -38
  -44
  -50
  -57
  -64
  -71
  -79
  -87
  -96
  -105
  -114
  -124
  -134
  -144
  -155
  -166
  -178
  -190
  -202
  -215
  -229
  -243
  -258
  -273

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  34
  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
  1,429
  1,700
  2,015
  2,360
  2,736
  3,142
  3,578
  4,042
  4,534
  5,053
  5,599
  6,172
  6,771
  7,397
  8,049
  8,727
  9,433
  10,167
  10,930
  11,722
  12,546
  13,402
  14,292
  15,218
  16,181
  17,184
  18,228
  19,316
  20,450
  21,633
  22,868
Adjusted assets (=assets-cash), $m
  1,395
  1,700
  2,015
  2,360
  2,736
  3,142
  3,578
  4,042
  4,534
  5,053
  5,599
  6,172
  6,771
  7,397
  8,049
  8,727
  9,433
  10,167
  10,930
  11,722
  12,546
  13,402
  14,292
  15,218
  16,181
  17,184
  18,228
  19,316
  20,450
  21,633
  22,868
Revenue / Adjusted assets
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
  0.024
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
  20
  24
  28
  33
  38
  43
  48
  54
  61
  67
  74
  81
  89
  97
  105
  113
  122
  131
  141
  151
  161
  172
  183
  194
  206
  219
  232
  245
  260
  274
Total debt, $m
  1,198
  1,438
  1,720
  2,030
  2,368
  2,733
  3,124
  3,540
  3,982
  4,449
  4,939
  5,454
  5,992
  6,553
  7,139
  7,748
  8,382
  9,041
  9,726
  10,438
  11,177
  11,946
  12,745
  13,577
  14,441
  15,342
  16,280
  17,257
  18,275
  19,338
  20,446
Total liabilities, $m
  1,287
  1,527
  1,809
  2,119
  2,457
  2,822
  3,213
  3,629
  4,071
  4,538
  5,028
  5,543
  6,081
  6,642
  7,228
  7,837
  8,471
  9,130
  9,815
  10,527
  11,266
  12,035
  12,834
  13,666
  14,530
  15,431
  16,369
  17,346
  18,364
  19,427
  20,535
Total equity, $m
  142
  173
  205
  241
  279
  320
  365
  412
  462
  515
  571
  630
  691
  754
  821
  890
  962
  1,037
  1,115
  1,196
  1,280
  1,367
  1,458
  1,552
  1,650
  1,753
  1,859
  1,970
  2,086
  2,207
  2,333
Total liabilities and equity, $m
  1,429
  1,700
  2,014
  2,360
  2,736
  3,142
  3,578
  4,041
  4,533
  5,053
  5,599
  6,173
  6,772
  7,396
  8,049
  8,727
  9,433
  10,167
  10,930
  11,723
  12,546
  13,402
  14,292
  15,218
  16,180
  17,184
  18,228
  19,316
  20,450
  21,634
  22,868
Debt-to-equity ratio
  8.437
  8.290
  8.370
  8.430
  8.490
  8.530
  8.560
  8.590
  8.610
  8.630
  8.650
  8.660
  8.680
  8.690
  8.700
  8.700
  8.710
  8.720
  8.720
  8.730
  8.730
  8.740
  8.740
  8.750
  8.750
  8.750
  8.760
  8.760
  8.760
  8.760
  8.770
Adjusted equity ratio
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  12
  -11
  -15
  -19
  -23
  -27
  -33
  -38
  -44
  -50
  -57
  -64
  -71
  -79
  -87
  -96
  -105
  -114
  -124
  -134
  -144
  -155
  -166
  -178
  -190
  -202
  -215
  -229
  -243
  -258
  -273
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
  5
  -11
  -15
  -19
  -23
  -27
  -33
  -38
  -44
  -50
  -57
  -64
  -71
  -79
  -87
  -96
  -105
  -114
  -124
  -134
  -144
  -155
  -166
  -178
  -190
  -202
  -215
  -229
  -243
  -258
  -273
Change in working capital, $m
  -15
  3
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
Cash from operations, $m
  20
  -14
  -19
  -23
  -27
  -32
  -38
  -44
  -50
  -56
  -63
  -71
  -79
  -87
  -95
  -104
  -113
  -123
  -133
  -143
  -154
  -165
  -177
  -189
  -201
  -214
  -228
  -242
  -257
  -272
  -288
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
  14
  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
  34
  -14
  -19
  -23
  -27
  -32
  -38
  -44
  -50
  -56
  -63
  -71
  -79
  -87
  -95
  -104
  -113
  -123
  -133
  -143
  -154
  -165
  -177
  -189
  -201
  -214
  -228
  -242
  -257
  -272
  -288
Issuance/(repayment) of debt, $m
  0
  274
  282
  310
  338
  365
  391
  417
  442
  466
  491
  514
  538
  562
  585
  609
  634
  659
  685
  712
  740
  769
  799
  831
  865
  900
  938
  977
  1,019
  1,062
  1,109
Issuance/(repurchase) of shares, $m
  0
  42
  47
  54
  61
  69
  77
  85
  94
  103
  113
  122
  133
  143
  154
  165
  177
  189
  201
  214
  228
  242
  257
  272
  288
  305
  322
  340
  359
  379
  399
Cash from financing (excl. dividends), $m  
  -24
  316
  329
  364
  399
  434
  468
  502
  536
  569
  604
  636
  671
  705
  739
  774
  811
  848
  886
  926
  968
  1,011
  1,056
  1,103
  1,153
  1,205
  1,260
  1,317
  1,378
  1,441
  1,508
Total cash flow (excl. dividends), $m
  9
  302
  311
  341
  372
  401
  430
  458
  486
  513
  540
  566
  592
  618
  644
  670
  697
  725
  754
  783
  814
  846
  879
  915
  952
  991
  1,032
  1,075
  1,121
  1,169
  1,220
Retained Cash Flow (-), $m
  3
  -42
  -47
  -54
  -61
  -69
  -77
  -85
  -94
  -103
  -113
  -122
  -133
  -143
  -154
  -165
  -177
  -189
  -201
  -214
  -228
  -242
  -257
  -272
  -288
  -305
  -322
  -340
  -359
  -379
  -399
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
 
  259
  264
  288
  310
  332
  353
  373
  392
  410
  427
  444
  459
  475
  490
  505
  521
  536
  552
  569
  586
  604
  623
  643
  664
  686
  710
  735
  762
  790
  820
Discount rate, %
 
  13.80
  14.49
  15.21
  15.98
  16.77
  17.61
  18.49
  19.42
  20.39
  21.41
  22.48
  23.60
  24.78
  26.02
  27.32
  28.69
  30.12
  31.63
  33.21
  34.87
  36.62
  38.45
  40.37
  42.39
  44.51
  46.73
  49.07
  51.52
  54.10
  56.80
PV of cash for distribution, $m
 
  228
  201
  188
  172
  153
  133
  114
  95
  77
  61
  48
  36
  27
  19
  13
  9
  6
  4
  2
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  76.0
  59.1
  46.2
  36.4
  28.8
  23.0
  18.4
  14.8
  12.0
  9.7
  7.9
  6.5
  5.3
  4.4
  3.6
  3.0
  2.5
  2.0
  1.7
  1.4
  1.2
  1.0
  0.8
  0.7
  0.6
  0.5
  0.4
  0.3
  0.3
  0.2

Ellington Residential Mortgage REIT, a real estate investment trust, specializes in acquiring, investing in, and managing residential mortgage-and real estate-related assets. It acquires and manages residential mortgage-backed securities, including agency pools and agency collateralized mortgage obligations (CMOs), and investment and non-investment grade non-agency CMOs. The company has elected to be taxed as a real estate investment trust. 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 2012 and is based in Old Greenwich, Connecticut.

FINANCIAL RATIOS  of  Ellington Residential Mortgage REIT (EARN)

Valuation Ratios
P/E Ratio 11.1
Price to Sales 3.9
Price to Book 0.9
Price to Tangible Book
Price to Cash Flow 6.7
Price to Free Cash Flow 6.7
Growth Rates
Sales Growth Rate -17.1%
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 843.7%
Interest Coverage 2
Management Effectiveness
Return On Assets 1.4%
Ret/ On Assets - 3 Yr. Avg. 1.1%
Return On Total Capital 0.9%
Ret/ On T. Cap. - 3 Yr. Avg. 0.7%
Return On Equity 8.4%
Return On Equity - 3 Yr. Avg. 6%
Asset Turnover 0
Profitability Ratios
Gross Margin 61.8%
Gross Margin - 3 Yr. Avg. 73.5%
EBITDA Margin 61.8%
EBITDA Margin - 3 Yr. Avg. 40.4%
Operating Margin 58.8%
Oper. Margin - 3 Yr. Avg. 70.2%
Pre-Tax Margin 35.3%
Pre-Tax Margin - 3 Yr. Avg. 23.1%
Net Profit Margin 35.3%
Net Profit Margin - 3 Yr. Avg. 23.1%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 133.3%

EARN stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the EARN stock intrinsic value calculation we used $34 million for the last fiscal year's total revenue generated by Ellington Residential Mortgage REIT. The default revenue input number comes from 2016 income statement of Ellington Residential Mortgage 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 EARN stock valuation model: a) initial revenue growth rate of 20% 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 13.8%, whose default value for EARN is calculated based on our internal credit rating of Ellington Residential Mortgage 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 Ellington Residential Mortgage 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 EARN stock the variable cost ratio is equal to 26.5%.

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 EARN 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 Ellington Residential Mortgage REIT.

Corporate tax rate of 27% is the nominal tax rate for Ellington Residential Mortgage 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 EARN 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 EARN are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in Ellington Residential Mortgage 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 EARN 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 - $142 million for Ellington Residential Mortgage 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 9.149 million for Ellington Residential Mortgage 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 Ellington Residential Mortgage REIT at the current share price and the inputted number of shares is $0.1 billion.

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COMPANY NEWS

▶ Ellington Residential posts 2Q profit   [Aug-02-17 12:02AM  Associated Press]
▶ Top Ranked Value Stocks to Buy for June 30th   [Jun-30-17 09:34AM  Zacks]
▶ New Strong Buy Stocks for June 1st   [Jun-01-17 09:05AM  Zacks]
▶ Ellington Residential posts 1Q profit   [May-02-17 07:49PM  Associated Press]
▶ Ellington Residential posts 4Q profit   [05:00AM  Associated Press]
▶ Here is What Hedge Funds Think About Willbros Group Inc (WG)   [Dec-15-16 06:04AM  Insider Monkey]
▶ Mortgage REIT M&A? Approved.   [Apr-11-16 03:42PM  at Bloomberg]
▶ Hedge Funds Are Betting On ContraFect Corp (CFRX)   [Dec-08  03:55AM  at Insider Monkey]
Stock chart of EARN Financial statements of EARN
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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