Intrinsic value of HFF Cl A - HF

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$28.35

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$28.35

 
Intrinsic value

$26.05

 
Up/down potential

-8%

 
Rating

hold

 
Value-price divergence* premium content

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

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

We calculate the intrinsic value of HF 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 1.1

 

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, %
  2.99
  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
  517
  527
  539
  553
  569
  586
  605
  626
  648
  672
  698
  725
  755
  786
  819
  855
  892
  932
  974
  1,018
  1,065
  1,114
  1,166
  1,221
  1,279
  1,340
  1,404
  1,472
  1,543
  1,617
  1,696
Variable operating expenses, $m
 
  414
  423
  434
  447
  460
  475
  491
  509
  527
  548
  569
  592
  617
  643
  670
  700
  731
  764
  799
  835
  874
  915
  958
  1,003
  1,051
  1,101
  1,154
  1,210
  1,268
  1,330
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
  422
  414
  423
  434
  447
  460
  475
  491
  509
  527
  548
  569
  592
  617
  643
  670
  700
  731
  764
  799
  835
  874
  915
  958
  1,003
  1,051
  1,101
  1,154
  1,210
  1,268
  1,330
Operating income, $m
  96
  113
  116
  119
  122
  126
  130
  135
  139
  145
  150
  157
  163
  170
  177
  184
  193
  201
  210
  220
  230
  240
  252
  264
  276
  289
  303
  318
  333
  349
  366
EBITDA, $m
  108
  123
  126
  129
  133
  137
  142
  146
  152
  157
  163
  170
  177
  184
  192
  200
  209
  218
  228
  238
  249
  261
  273
  286
  299
  314
  329
  344
  361
  378
  397
Interest expense (income), $m
  9
  2
  2
  2
  3
  3
  3
  3
  4
  4
  5
  5
  5
  6
  6
  7
  8
  8
  9
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
Earnings before tax, $m
  128
  111
  114
  117
  120
  123
  127
  131
  136
  140
  146
  152
  157
  164
  170
  178
  185
  193
  201
  210
  220
  229
  240
  251
  262
  275
  287
  301
  315
  330
  346
Tax expense, $m
  51
  30
  31
  32
  32
  33
  34
  35
  37
  38
  39
  41
  43
  44
  46
  48
  50
  52
  54
  57
  59
  62
  65
  68
  71
  74
  78
  81
  85
  89
  93
Net income, $m
  77
  81
  83
  85
  87
  90
  93
  96
  99
  103
  106
  111
  115
  120
  124
  130
  135
  141
  147
  153
  160
  167
  175
  183
  192
  200
  210
  220
  230
  241
  252

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  236
  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
  717
  491
  502
  515
  529
  545
  563
  582
  603
  625
  649
  675
  702
  731
  762
  795
  830
  867
  906
  947
  991
  1,037
  1,085
  1,136
  1,190
  1,247
  1,306
  1,369
  1,435
  1,504
  1,578
Adjusted assets (=assets-cash), $m
  481
  491
  502
  515
  529
  545
  563
  582
  603
  625
  649
  675
  702
  731
  762
  795
  830
  867
  906
  947
  991
  1,037
  1,085
  1,136
  1,190
  1,247
  1,306
  1,369
  1,435
  1,504
  1,578
Revenue / Adjusted assets
  1.075
  1.073
  1.074
  1.074
  1.076
  1.075
  1.075
  1.076
  1.075
  1.075
  1.076
  1.074
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
  1.074
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
  1.075
Average production assets, $m
  47
  48
  49
  50
  52
  53
  55
  57
  59
  61
  64
  66
  69
  72
  75
  78
  81
  85
  89
  93
  97
  101
  106
  111
  116
  122
  128
  134
  140
  147
  154
Working capital, $m
  175
  235
  240
  246
  253
  261
  269
  278
  288
  299
  311
  323
  336
  350
  365
  380
  397
  415
  433
  453
  474
  496
  519
  543
  569
  596
  625
  655
  686
  720
  755
Total debt, $m
  292
  61
  66
  73
  80
  88
  97
  107
  118
  129
  141
  154
  168
  183
  198
  215
  233
  252
  271
  292
  314
  338
  362
  388
  415
  444
  474
  506
  540
  575
  612
Total liabilities, $m
  480
  249
  254
  261
  268
  276
  285
  295
  306
  317
  329
  342
  356
  371
  386
  403
  421
  440
  459
  480
  502
  526
  550
  576
  603
  632
  662
  694
  728
  763
  800
Total equity, $m
  237
  242
  247
  254
  261
  269
  277
  287
  297
  308
  320
  333
  346
  361
  376
  392
  409
  427
  447
  467
  488
  511
  535
  560
  587
  615
  644
  675
  707
  742
  778
Total liabilities and equity, $m
  717
  491
  501
  515
  529
  545
  562
  582
  603
  625
  649
  675
  702
  732
  762
  795
  830
  867
  906
  947
  990
  1,037
  1,085
  1,136
  1,190
  1,247
  1,306
  1,369
  1,435
  1,505
  1,578
Debt-to-equity ratio
  1.232
  0.250
  0.270
  0.290
  0.310
  0.330
  0.350
  0.370
  0.400
  0.420
  0.440
  0.460
  0.490
  0.510
  0.530
  0.550
  0.570
  0.590
  0.610
  0.630
  0.640
  0.660
  0.680
  0.690
  0.710
  0.720
  0.740
  0.750
  0.760
  0.770
  0.790
Adjusted equity ratio
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  77
  81
  83
  85
  87
  90
  93
  96
  99
  103
  106
  111
  115
  120
  124
  130
  135
  141
  147
  153
  160
  167
  175
  183
  192
  200
  210
  220
  230
  241
  252
Depreciation, amort., depletion, $m
  12
  10
  10
  10
  11
  11
  11
  12
  12
  13
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  26
  27
  28
  29
  31
Funds from operations, $m
  57
  91
  93
  96
  98
  101
  104
  108
  111
  115
  119
  124
  129
  134
  139
  145
  151
  158
  165
  172
  180
  188
  196
  205
  215
  225
  235
  246
  258
  270
  283
Change in working capital, $m
  -22
  5
  5
  6
  7
  8
  8
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  29
  30
  32
  33
  35
Cash from operations, $m
  79
  93
  88
  89
  91
  93
  96
  98
  101
  104
  108
  112
  116
  120
  125
  129
  135
  140
  146
  152
  159
  166
  173
  181
  189
  198
  207
  216
  227
  237
  248
Maintenance CAPEX, $m
  0
  -9
  -10
  -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
  -29
New CAPEX, $m
  -5
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
Cash from investing activities, $m
  -5
  -10
  -11
  -11
  -11
  -12
  -13
  -13
  -13
  -14
  -14
  -16
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -36
Free cash flow, $m
  74
  82
  77
  78
  80
  81
  83
  86
  88
  91
  93
  96
  100
  103
  107
  111
  116
  120
  125
  131
  136
  142
  148
  155
  162
  169
  177
  185
  193
  202
  212
Issuance/(repayment) of debt, $m
  -1
  5
  6
  7
  7
  8
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  25
  26
  27
  29
  30
  32
  33
  35
  37
Issuance/(repurchase) of shares, $m
  -3
  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  
  -4
  5
  6
  7
  7
  8
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  25
  26
  27
  29
  30
  32
  33
  35
  37
Total cash flow (excl. dividends), $m
  70
  87
  83
  85
  87
  90
  92
  95
  98
  102
  106
  109
  114
  118
  123
  128
  133
  139
  145
  151
  158
  165
  173
  181
  189
  198
  207
  217
  227
  238
  249
Retained Cash Flow (-), $m
  -22
  -5
  -6
  -6
  -7
  -8
  -9
  -9
  -10
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -33
  -34
  -36
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
 
  82
  77
  79
  80
  82
  84
  86
  88
  91
  94
  97
  100
  104
  108
  112
  116
  121
  126
  131
  137
  143
  149
  155
  162
  170
  177
  186
  194
  203
  213
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  79
  71
  68
  66
  63
  61
  58
  55
  52
  49
  46
  43
  39
  36
  33
  30
  26
  23
  20
  17
  15
  12
  10
  8
  7
  5
  4
  3
  2
  2
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

HFF, Inc. provides commercial real estate and capital market services to the users and providers of capital in the United States commercial real estate industry. It offers debt placement services, such as construction and construction/mini-permanent loans, adjustable and fixed rate mortgages, entity level debts, mezzanine debts, forward delivery loans, tax exempt financing, and sale/leaseback financing to the owners of various properties comprising office, retail, industrial, hotel, multi-housing, student housing, self-storage, senior living, independent living, assisted living, nursing homes, condominiums and condominium conversions, mixed-use properties, and land. The company also provides investment sales services to commercial real estate owners; and equity placement and private equity alternatives and solutions, as well as assists clients in the sale of their commercial real estate debt note portfolios. In addition, it offers private equity, investment banking, and advisory services, including equity capital to establish joint ventures relating to identified properties or properties to be acquired by a fund sponsor; private placements of preferred securities; entity-level advisory services for mergers and acquisitions, sales and divestitures, management buyouts, and recapitalizations and restructurings; and institutional marketing and fund-raising for public and private commercial real estate companies. Further, the company provides commercial loan servicing to life insurance companies. HFF, Inc. was founded in 1982 and is based in Pittsburgh, Pennsylvania. HFF, Inc. operates as a subsidiary of HFF Holdings, LLC

FINANCIAL RATIOS  of  HFF Cl A (HF)

Valuation Ratios
P/E Ratio 14
Price to Sales 2.1
Price to Book 4.6
Price to Tangible Book
Price to Cash Flow 13.7
Price to Free Cash Flow 14.6
Growth Rates
Sales Growth Rate 3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -16.7%
Cap. Spend. - 3 Yr. Gr. Rate 10.8%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 0.4%
Total Debt to Equity 123.2%
Interest Coverage 15
Management Effectiveness
Return On Assets 11.3%
Ret/ On Assets - 3 Yr. Avg. 11.9%
Return On Total Capital 14.5%
Ret/ On T. Cap. - 3 Yr. Avg. 17.3%
Return On Equity 34.1%
Return On Equity - 3 Yr. Avg. 36.6%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 43.7%
Gross Margin - 3 Yr. Avg. 43.6%
EBITDA Margin 28.8%
EBITDA Margin - 3 Yr. Avg. 29%
Operating Margin 18.4%
Oper. Margin - 3 Yr. Avg. 19.9%
Pre-Tax Margin 24.8%
Pre-Tax Margin - 3 Yr. Avg. 25.8%
Net Profit Margin 14.9%
Net Profit Margin - 3 Yr. Avg. 15.3%
Effective Tax Rate 39.8%
Eff/ Tax Rate - 3 Yr. Avg. 40.7%
Payout Ratio 88.3%

HF stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HF stock intrinsic value calculation we used $517 million for the last fiscal year's total revenue generated by HFF Cl A. The default revenue input number comes from 2016 income statement of HFF Cl A. 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 HF 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 4.3%, whose default value for HF is calculated based on our internal credit rating of HFF Cl A, 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 HFF Cl A.
    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 HF stock the variable cost ratio is equal to 78.5%.

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 HF 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 HFF Cl A.

Corporate tax rate of 27% is the nominal tax rate for HFF Cl A. 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 HF 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 HF are equal to 9.1%.

Life of production assets of 4.3 years is the average useful life of capital assets used in HFF Cl A 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 HF is equal to 44.5%. 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 - $237 million for HFF Cl A - 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 38.67 million for HFF Cl A 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 HFF Cl A at the current share price and the inputted number of shares is $1.1 billion.


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COMPANY NEWS

▶ HFF Acquires Hentschel & Company in New York City   [Mar-29-17 10:47AM  Business Wire]
▶ 3 Reasons to Go Long on HFF   [Mar-16-17 02:18PM  TheStreet.com]
▶ HFF, Inc. (HF): Hedge Fund Sentiment Unchanged   [Dec-12-16 04:41PM  at Insider Monkey]
▶ Sale of The Palms at Town & Country in Miami Closed by HFF   [Aug-01-16 04:25PM  Business Wire]
Stock chart of HF Financial statements of HF
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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