Intrinsic value of Ellington Residential Mortgage REIT - EARN

Previous Close

$14.86

  Intrinsic Value

premium content

  Rating & Target

premium content

  Value-price divergence*

premium content

Previous close

$14.86

 
Intrinsic value premium content
 
Up/down potential premium content
 
Rating premium content
 
Value-price divergence* premium content

Premium access subscription - $499/yr

please register and log in before paying
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
  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
  34
  35
  35
  36
  37
  39
  40
  41
  43
  44
  46
  48
  50
  52
  54
  56
  59
  61
  64
  67
  70
  73
  77
  80
  84
  88
  92
  97
  101
  106
  112
Variable operating expenses, $m
 
  9
  9
  10
  10
  10
  11
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
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
  9
  9
  10
  10
  10
  11
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
Operating income, $m
  19
  25
  26
  27
  27
  28
  29
  30
  31
  32
  34
  35
  36
  38
  40
  41
  43
  45
  47
  49
  51
  54
  56
  59
  62
  65
  68
  71
  75
  78
  82
EBITDA, $m
  19
  25
  26
  27
  27
  28
  29
  30
  31
  32
  34
  35
  36
  38
  40
  41
  43
  45
  47
  49
  51
  54
  56
  59
  62
  65
  68
  71
  75
  78
  82
Interest expense (income), $m
  9
  41
  42
  43
  45
  46
  47
  49
  51
  53
  55
  57
  59
  62
  65
  67
  71
  74
  77
  81
  85
  89
  93
  97
  102
  107
  112
  118
  124
  130
  136
Earnings before tax, $m
  12
  -15
  -16
  -17
  -17
  -18
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54
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
  -15
  -16
  -17
  -17
  -18
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54

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
  1,445
  1,478
  1,516
  1,559
  1,606
  1,658
  1,714
  1,776
  1,841
  1,912
  1,988
  2,068
  2,154
  2,246
  2,342
  2,445
  2,554
  2,669
  2,790
  2,918
  3,054
  3,196
  3,347
  3,505
  3,672
  3,848
  4,032
  4,227
  4,432
  4,647
Adjusted assets (=assets-cash), $m
  1,395
  1,445
  1,478
  1,516
  1,559
  1,606
  1,658
  1,714
  1,776
  1,841
  1,912
  1,988
  2,068
  2,154
  2,246
  2,342
  2,445
  2,554
  2,669
  2,790
  2,918
  3,054
  3,196
  3,347
  3,505
  3,672
  3,848
  4,032
  4,227
  4,432
  4,647
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
  17
  18
  18
  19
  19
  20
  21
  21
  22
  23
  24
  25
  26
  27
  28
  29
  31
  32
  33
  35
  37
  38
  40
  42
  44
  46
  48
  51
  53
  56
Total debt, $m
  1,198
  1,209
  1,238
  1,273
  1,311
  1,353
  1,400
  1,451
  1,505
  1,565
  1,628
  1,696
  1,768
  1,846
  1,928
  2,014
  2,107
  2,204
  2,307
  2,416
  2,532
  2,653
  2,781
  2,916
  3,058
  3,208
  3,366
  3,532
  3,707
  3,891
  4,084
Total liabilities, $m
  1,287
  1,298
  1,327
  1,362
  1,400
  1,442
  1,489
  1,540
  1,594
  1,654
  1,717
  1,785
  1,857
  1,935
  2,017
  2,103
  2,196
  2,293
  2,396
  2,505
  2,621
  2,742
  2,870
  3,005
  3,147
  3,297
  3,455
  3,621
  3,796
  3,980
  4,173
Total equity, $m
  142
  147
  151
  155
  159
  164
  169
  175
  181
  188
  195
  203
  211
  220
  229
  239
  249
  260
  272
  285
  298
  311
  326
  341
  358
  375
  392
  411
  431
  452
  474
Total liabilities and equity, $m
  1,429
  1,445
  1,478
  1,517
  1,559
  1,606
  1,658
  1,715
  1,775
  1,842
  1,912
  1,988
  2,068
  2,155
  2,246
  2,342
  2,445
  2,553
  2,668
  2,790
  2,919
  3,053
  3,196
  3,346
  3,505
  3,672
  3,847
  4,032
  4,227
  4,432
  4,647
Debt-to-equity ratio
  8.437
  8.200
  8.210
  8.230
  8.240
  8.260
  8.280
  8.290
  8.310
  8.330
  8.350
  8.360
  8.380
  8.400
  8.420
  8.430
  8.450
  8.460
  8.480
  8.490
  8.500
  8.520
  8.530
  8.540
  8.550
  8.570
  8.580
  8.590
  8.600
  8.610
  8.620
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
  -15
  -16
  -17
  -17
  -18
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54
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
  -15
  -16
  -17
  -17
  -18
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54
Change in working capital, $m
  -15
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
Cash from operations, $m
  20
  -16
  -17
  -17
  -18
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -51
  -54
  -57
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
  -16
  -17
  -17
  -18
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -51
  -54
  -57
Issuance/(repayment) of debt, $m
  0
  45
  30
  34
  38
  42
  47
  51
  55
  59
  63
  68
  72
  77
  82
  87
  92
  98
  103
  109
  115
  121
  128
  135
  142
  150
  158
  166
  175
  184
  193
Issuance/(repurchase) of shares, $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 financing (excl. dividends), $m  
  -24
  45
  30
  34
  38
  42
  47
  51
  55
  59
  63
  68
  72
  77
  82
  87
  92
  98
  103
  109
  115
  121
  128
  135
  142
  150
  158
  166
  175
  184
  193
Total cash flow (excl. dividends), $m
  9
  29
  13
  17
  21
  24
  28
  31
  35
  38
  42
  45
  49
  52
  56
  60
  64
  68
  72
  76
  80
  85
  90
  95
  100
  106
  111
  117
  123
  130
  137
Retained Cash Flow (-), $m
  3
  -5
  -3
  -4
  -4
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
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
 
  24
  10
  13
  16
  20
  23
  26
  28
  31
  34
  37
  40
  43
  47
  50
  53
  57
  60
  64
  67
  71
  75
  80
  84
  89
  93
  98
  103
  109
  115
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
 
  21
  7
  9
  9
  9
  9
  8
  7
  6
  5
  4
  3
  2
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  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

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 11.3
Price to Sales 4
Price to Book 1
Price to Tangible Book
Price to Cash Flow 6.8
Price to Free Cash Flow 6.8
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 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 13.8%, 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.


Premium access subscription - $499/yr

please register and log in before paying
RELATED COMPANIES Price Int.Val. Rating
EFC Ellington Fina 16.26 prem.  prem.
ORC Orchid Island 9.94 prem.  prem.
TWO Two Harbors In 10.01 prem.  prem.
WMC Western Asset 10.43 prem.  prem.
OAKS Five Oaks Inve 4.90 prem.  prem.
MITT AG Mortgage In 18.48 prem.  prem.
CYS CYS Investment 8.53 prem.  prem.
MTGE MTGE Investmen 18.80 prem.  prem.

COMPANY NEWS

▶ 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 Annual reports 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.

FREE DOWNLOAD
Follow us on:   twitter   twitter   twitter   twitter

VALUATION THEORY       ASSET ALLOCATION

About X-FIN       Site news       Privacy policy       Terms of use       FAQ

Copyright © X-FIN.com 2005-2017. All rigths reserved.