Intrinsic value of Redwood Trust - RWT

Previous Close

$16.64

  Intrinsic Value

$3.75

stock screener

  Rating & Target

str. sell

-77%

  Value-price divergence*

-67%

Previous close

$16.64

 
Intrinsic value

$3.75

 
Up/down potential

-77%

 
Rating

str. sell

 
Value-price divergence*

-67%

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

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

We calculate the intrinsic value of RWT 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 1.3

 

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, %
  -5.02
  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
  246
  251
  257
  263
  271
  279
  288
  298
  308
  320
  332
  345
  359
  374
  390
  407
  425
  443
  463
  484
  507
  530
  555
  581
  609
  638
  668
  700
  734
  770
  807
Variable operating expenses, $m
 
  163
  167
  171
  176
  181
  187
  194
  200
  208
  216
  224
  233
  243
  253
  264
  276
  288
  301
  315
  329
  345
  361
  378
  396
  414
  434
  455
  477
  500
  525
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
  111
  163
  167
  171
  176
  181
  187
  194
  200
  208
  216
  224
  233
  243
  253
  264
  276
  288
  301
  315
  329
  345
  361
  378
  396
  414
  434
  455
  477
  500
  525
Operating income, $m
  135
  88
  90
  92
  95
  98
  101
  104
  108
  112
  116
  121
  126
  131
  136
  142
  149
  155
  162
  170
  177
  186
  194
  203
  213
  223
  234
  245
  257
  269
  282
EBITDA, $m
  136
  88
  90
  92
  95
  98
  101
  105
  108
  112
  117
  121
  126
  131
  137
  143
  149
  156
  163
  170
  178
  186
  195
  204
  214
  224
  235
  246
  258
  270
  283
Interest expense (income), $m
  87
  139
  141
  144
  148
  152
  157
  162
  168
  174
  181
  188
  196
  204
  213
  222
  232
  242
  253
  265
  277
  290
  304
  318
  333
  349
  366
  384
  403
  422
  443
Earnings before tax, $m
  135
  -51
  -51
  -52
  -53
  -55
  -56
  -58
  -60
  -62
  -65
  -67
  -70
  -73
  -76
  -80
  -83
  -87
  -91
  -95
  -100
  -104
  -109
  -115
  -120
  -126
  -132
  -139
  -146
  -153
  -161
Tax expense, $m
  4
  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
  131
  -51
  -51
  -52
  -53
  -55
  -56
  -58
  -60
  -62
  -65
  -67
  -70
  -73
  -76
  -80
  -83
  -87
  -91
  -95
  -100
  -104
  -109
  -115
  -120
  -126
  -132
  -139
  -146
  -153
  -161

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  213
  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
  5,483
  5,339
  5,462
  5,602
  5,759
  5,934
  6,126
  6,334
  6,560
  6,803
  7,064
  7,344
  7,642
  7,959
  8,296
  8,654
  9,034
  9,435
  9,860
  10,308
  10,782
  11,282
  11,809
  12,364
  12,950
  13,566
  14,215
  14,898
  15,617
  16,374
  17,169
Adjusted assets (=assets-cash), $m
  5,270
  5,339
  5,462
  5,602
  5,759
  5,934
  6,126
  6,334
  6,560
  6,803
  7,064
  7,344
  7,642
  7,959
  8,296
  8,654
  9,034
  9,435
  9,860
  10,308
  10,782
  11,282
  11,809
  12,364
  12,950
  13,566
  14,215
  14,898
  15,617
  16,374
  17,169
Revenue / Adjusted assets
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
  0.047
Average production assets, $m
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
Working capital, $m
  0
  125
  128
  132
  135
  139
  144
  149
  154
  160
  166
  173
  180
  187
  195
  203
  212
  222
  232
  242
  253
  265
  278
  291
  304
  319
  334
  350
  367
  385
  403
Total debt, $m
  4,186
  4,027
  4,123
  4,233
  4,356
  4,492
  4,642
  4,805
  4,982
  5,172
  5,376
  5,595
  5,828
  6,076
  6,340
  6,620
  6,916
  7,230
  7,562
  7,913
  8,283
  8,674
  9,086
  9,521
  9,979
  10,461
  10,968
  11,502
  12,065
  12,656
  13,278
Total liabilities, $m
  4,334
  4,175
  4,271
  4,381
  4,504
  4,640
  4,790
  4,953
  5,130
  5,320
  5,524
  5,743
  5,976
  6,224
  6,488
  6,768
  7,064
  7,378
  7,710
  8,061
  8,431
  8,822
  9,234
  9,669
  10,127
  10,609
  11,116
  11,650
  12,213
  12,804
  13,426
Total equity, $m
  1,149
  1,164
  1,191
  1,221
  1,256
  1,294
  1,335
  1,381
  1,430
  1,483
  1,540
  1,601
  1,666
  1,735
  1,809
  1,887
  1,969
  2,057
  2,149
  2,247
  2,350
  2,459
  2,574
  2,695
  2,823
  2,957
  3,099
  3,248
  3,405
  3,569
  3,743
Total liabilities and equity, $m
  5,483
  5,339
  5,462
  5,602
  5,760
  5,934
  6,125
  6,334
  6,560
  6,803
  7,064
  7,344
  7,642
  7,959
  8,297
  8,655
  9,033
  9,435
  9,859
  10,308
  10,781
  11,281
  11,808
  12,364
  12,950
  13,566
  14,215
  14,898
  15,618
  16,373
  17,169
Debt-to-equity ratio
  3.643
  3.460
  3.460
  3.470
  3.470
  3.470
  3.480
  3.480
  3.480
  3.490
  3.490
  3.490
  3.500
  3.500
  3.510
  3.510
  3.510
  3.520
  3.520
  3.520
  3.520
  3.530
  3.530
  3.530
  3.530
  3.540
  3.540
  3.540
  3.540
  3.550
  3.550
Adjusted equity ratio
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218
  0.218

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  131
  -51
  -51
  -52
  -53
  -55
  -56
  -58
  -60
  -62
  -65
  -67
  -70
  -73
  -76
  -80
  -83
  -87
  -91
  -95
  -100
  -104
  -109
  -115
  -120
  -126
  -132
  -139
  -146
  -153
  -161
Depreciation, amort., depletion, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
Funds from operations, $m
  -500
  -51
  -51
  -52
  -53
  -55
  -56
  -58
  -60
  -62
  -64
  -67
  -70
  -73
  -76
  -79
  -83
  -86
  -90
  -95
  -99
  -104
  -109
  -114
  -119
  -125
  -131
  -138
  -145
  -152
  -160
Change in working capital, $m
  46
  2
  3
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  19
Cash from operations, $m
  -546
  -53
  -54
  -55
  -57
  -59
  -61
  -63
  -65
  -68
  -71
  -74
  -77
  -80
  -84
  -87
  -91
  -96
  -100
  -105
  -110
  -115
  -121
  -127
  -133
  -140
  -147
  -154
  -162
  -170
  -178
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
New CAPEX, $m
  -15
  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
  1,334
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
Free cash flow, $m
  788
  -54
  -54
  -55
  -57
  -59
  -61
  -63
  -66
  -68
  -71
  -74
  -77
  -81
  -84
  -88
  -92
  -96
  -101
  -106
  -111
  -116
  -122
  -128
  -134
  -141
  -148
  -155
  -163
  -171
  -179
Issuance/(repayment) of debt, $m
  -672
  54
  96
  110
  123
  137
  150
  163
  177
  190
  204
  218
  233
  248
  264
  280
  297
  314
  332
  351
  370
  391
  412
  434
  458
  482
  508
  534
  562
  591
  622
Issuance/(repurchase) of shares, $m
  -28
  66
  78
  83
  88
  93
  98
  104
  110
  115
  122
  128
  135
  142
  150
  158
  166
  174
  183
  193
  203
  213
  224
  236
  248
  260
  274
  288
  302
  318
  334
Cash from financing (excl. dividends), $m  
  -707
  120
  174
  193
  211
  230
  248
  267
  287
  305
  326
  346
  368
  390
  414
  438
  463
  488
  515
  544
  573
  604
  636
  670
  706
  742
  782
  822
  864
  909
  956
Total cash flow (excl. dividends), $m
  81
  66
  120
  137
  154
  170
  187
  204
  220
  238
  255
  273
  291
  310
  329
  349
  370
  392
  414
  438
  462
  488
  515
  542
  571
  602
  634
  667
  702
  738
  777
Retained Cash Flow (-), $m
  -3
  -66
  -78
  -83
  -88
  -93
  -98
  -104
  -110
  -115
  -122
  -128
  -135
  -142
  -150
  -158
  -166
  -174
  -183
  -193
  -203
  -213
  -224
  -236
  -248
  -260
  -274
  -288
  -302
  -318
  -334
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
 
  0
  42
  54
  66
  78
  89
  100
  111
  122
  133
  144
  156
  168
  180
  192
  204
  218
  231
  245
  260
  275
  290
  307
  324
  341
  360
  379
  399
  421
  443
Discount rate, %
 
  12.60
  13.23
  13.89
  14.59
  15.32
  16.08
  16.89
  17.73
  18.62
  19.55
  20.52
  21.55
  22.63
  23.76
  24.95
  26.19
  27.50
  28.88
  30.32
  31.84
  33.43
  35.10
  36.86
  38.70
  40.64
  42.67
  44.80
  47.04
  49.39
  51.86
PV of cash for distribution, $m
 
  0
  33
  37
  38
  38
  36
  34
  30
  26
  22
  19
  15
  12
  9
  7
  5
  3
  2
  2
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  95.1
  89.7
  84.4
  79.3
  74.3
  69.6
  65.0
  60.7
  56.6
  52.7
  49.0
  45.5
  42.3
  39.2
  36.4
  33.7
  31.2
  28.9
  26.7
  24.7
  22.9
  21.1
  19.5
  18.0
  16.6
  15.4
  14.2
  13.1
  12.1
  11.1

Redwood Trust, Inc., through its subsidiaries, focuses on investing in mortgage and other real estate related assets. The Company is engaged in mortgage banking activities. The Company operates through three segments: Residential Investments, Residential Mortgage Banking and Commercial. The Residential Investments segment includes a portfolio of investments in residential mortgage-backed securities (RMBS) retained from its Sequoia securitizations. The Residential Mortgage Banking segment consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to its investment portfolio. Its Commercial segment consists of investments in multi-family securities and commercial mortgage-backed securities, as well as a remaining commercial loan investment following the sale of the remainder of its commercial mezzanine loan portfolio.

FINANCIAL RATIOS  of  Redwood Trust (RWT)

Valuation Ratios
P/E Ratio 9.8
Price to Sales 5.2
Price to Book 1.1
Price to Tangible Book
Price to Cash Flow -2.3
Price to Free Cash Flow -2.3
Growth Rates
Sales Growth Rate -5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -53.1%
Cap. Spend. - 3 Yr. Gr. Rate 38%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 295.4%
Total Debt to Equity 364.3%
Interest Coverage 3
Management Effectiveness
Return On Assets 3.7%
Ret/ On Assets - 3 Yr. Avg. 3.5%
Return On Total Capital 2.3%
Ret/ On T. Cap. - 3 Yr. Avg. 2%
Return On Equity 11.4%
Return On Equity - 3 Yr. Avg. 9.3%
Asset Turnover 0
Profitability Ratios
Gross Margin 64.2%
Gross Margin - 3 Yr. Avg. 63.9%
EBITDA Margin 90.7%
EBITDA Margin - 3 Yr. Avg. 78.6%
Operating Margin 54.9%
Oper. Margin - 3 Yr. Avg. 43.9%
Pre-Tax Margin 54.9%
Pre-Tax Margin - 3 Yr. Avg. 44%
Net Profit Margin 53.3%
Net Profit Margin - 3 Yr. Avg. 44.8%
Effective Tax Rate 3%
Eff/ Tax Rate - 3 Yr. Avg. -2.6%
Payout Ratio 67.2%

RWT stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the RWT stock intrinsic value calculation we used $246 million for the last fiscal year's total revenue generated by Redwood Trust. The default revenue input number comes from 2016 income statement of Redwood Trust. 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 RWT 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 12.6%, whose default value for RWT is calculated based on our internal credit rating of Redwood Trust, 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 Redwood Trust.
    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 RWT stock the variable cost ratio is equal to 65%.

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 RWT 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 Redwood Trust.

Corporate tax rate of 27% is the nominal tax rate for Redwood Trust. 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 RWT 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 RWT are equal to 0.6%.

Life of production assets of 1.5 years is the average useful life of capital assets used in Redwood Trust 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 RWT 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 - $1149 million for Redwood Trust - 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 76.694 million for Redwood Trust 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 Redwood Trust at the current share price and the inputted number of shares is $1.3 billion.

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COMPANY NEWS

▶ New Strong Sell Stocks for August 29th   [Aug-29-17 09:54AM  Zacks]
▶ Redwood Trust Reports Second Quarter 2017 Results   [Aug-03-17 04:15PM  PR Newswire]
▶ Redwood Trust posts 1Q profit   [May-04-17 07:57PM  Associated Press]
▶ Redwood Trust posts 4Q profit   [05:53PM  Associated Press]
▶ Borrowers Who Make Less Money Are Now Getting Jumbo Home Loans   [Oct-21-16 12:14AM  at The Wall Street Journal]
▶ Ignore Clinton And Trump, The Fed Is A Sideshow   [Oct-11-16 07:43PM  at Forbes]
Financial statements of RWT
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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