Intrinsic value of Two Harbors Investment - TWO

Previous Close

$10.11

  Intrinsic Value

$61.90

stock screener

  Rating & Target

str. buy

+512%

Previous close

$10.11

 
Intrinsic value

$61.90

 
Up/down potential

+512%

 
Rating

str. buy

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

We calculate the intrinsic value of TWO 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 3.5

 

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, %
  -12.62
  47.20
  42.98
  39.18
  35.76
  32.69
  29.92
  27.43
  25.18
  23.17
  21.35
  19.71
  18.24
  16.92
  15.73
  14.65
  13.69
  12.82
  12.04
  11.33
  10.70
  10.13
  9.62
  9.16
  8.74
  8.37
  8.03
  7.73
  7.45
  7.21
  6.99
Revenue, $m
  526
  774
  1,107
  1,541
  2,092
  2,776
  3,606
  4,595
  5,752
  7,085
  8,598
  10,292
  12,170
  14,229
  16,467
  18,880
  21,464
  24,216
  27,131
  30,206
  33,438
  36,826
  40,368
  44,063
  47,915
  51,923
  56,093
  60,427
  64,931
  69,611
  74,475
Variable operating expenses, $m
 
  162
  231
  322
  437
  580
  754
  960
  1,202
  1,481
  1,797
  2,151
  2,544
  2,974
  3,442
  3,946
  4,486
  5,061
  5,670
  6,313
  6,989
  7,697
  8,437
  9,209
  10,014
  10,852
  11,723
  12,629
  13,571
  14,549
  15,565
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
  161
  162
  231
  322
  437
  580
  754
  960
  1,202
  1,481
  1,797
  2,151
  2,544
  2,974
  3,442
  3,946
  4,486
  5,061
  5,670
  6,313
  6,989
  7,697
  8,437
  9,209
  10,014
  10,852
  11,723
  12,629
  13,571
  14,549
  15,565
Operating income, $m
  366
  612
  876
  1,219
  1,655
  2,196
  2,852
  3,635
  4,550
  5,604
  6,801
  8,141
  9,627
  11,255
  13,025
  14,934
  16,978
  19,155
  21,461
  23,893
  26,450
  29,129
  31,931
  34,854
  37,901
  41,071
  44,369
  47,797
  51,360
  55,062
  58,910
EBITDA, $m
  367
  613
  877
  1,220
  1,656
  2,198
  2,855
  3,638
  4,555
  5,610
  6,808
  8,150
  9,636
  11,267
  13,038
  14,949
  16,995
  19,174
  21,482
  23,917
  26,476
  29,159
  31,963
  34,889
  37,939
  41,113
  44,414
  47,846
  51,412
  55,118
  58,970
Interest expense (income), $m
  116
  561
  820
  1,177
  1,642
  2,233
  2,966
  3,856
  4,916
  6,157
  7,585
  9,207
  11,024
  13,037
  15,244
  17,643
  20,230
  23,001
  25,950
  29,075
  32,372
  35,837
  39,469
  43,265
  47,228
  51,356
  55,654
  60,123
  64,769
  69,598
  74,616
Earnings before tax, $m
  366
  52
  56
  42
  13
  -37
  -113
  -221
  -366
  -553
  -785
  -1,065
  -1,397
  -1,782
  -2,219
  -2,709
  -3,252
  -3,846
  -4,490
  -5,182
  -5,922
  -6,708
  -7,538
  -8,411
  -9,327
  -10,285
  -11,284
  -12,326
  -13,409
  -14,536
  -15,706
Tax expense, $m
  13
  14
  15
  11
  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
Net income, $m
  353
  38
  41
  31
  9
  -37
  -113
  -221
  -366
  -553
  -785
  -1,065
  -1,397
  -1,782
  -2,219
  -2,709
  -3,252
  -3,846
  -4,490
  -5,182
  -5,922
  -6,708
  -7,538
  -8,411
  -9,327
  -10,285
  -11,284
  -12,326
  -13,409
  -14,536
  -15,706

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  407
  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
  20,112
  28,677
  41,002
  57,067
  77,477
  102,802
  133,559
  170,190
  213,051
  262,406
  318,427
  381,203
  450,745
  527,004
  609,884
  699,257
  794,975
  896,889
  1,004,855
  1,118,745
  1,238,457
  1,363,919
  1,495,094
  1,631,981
  1,774,619
  1,923,086
  2,077,500
  2,238,020
  2,404,840
  2,578,194
  2,758,350
Adjusted assets (=assets-cash), $m
  19,705
  28,677
  41,002
  57,067
  77,477
  102,802
  133,559
  170,190
  213,051
  262,406
  318,427
  381,203
  450,745
  527,004
  609,884
  699,257
  794,975
  896,889
  1,004,855
  1,118,745
  1,238,457
  1,363,919
  1,495,094
  1,631,981
  1,774,619
  1,923,086
  2,077,500
  2,238,020
  2,404,840
  2,578,194
  2,758,350
Revenue / Adjusted assets
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
  0.027
Average production assets, $m
  2
  3
  4
  6
  8
  11
  14
  18
  23
  28
  34
  41
  49
  57
  66
  76
  86
  97
  109
  121
  134
  147
  161
  176
  192
  208
  224
  242
  260
  278
  298
Working capital, $m
  0
  387
  554
  770
  1,046
  1,388
  1,803
  2,298
  2,876
  3,542
  4,299
  5,146
  6,085
  7,115
  8,233
  9,440
  10,732
  12,108
  13,566
  15,103
  16,719
  18,413
  20,184
  22,032
  23,957
  25,962
  28,046
  30,213
  32,465
  34,806
  37,238
Total debt, $m
  16,424
  23,429
  33,622
  46,908
  63,786
  84,730
  110,166
  140,460
  175,906
  216,723
  263,052
  314,968
  372,479
  435,545
  504,087
  577,998
  657,158
  741,440
  830,728
  924,915
  1,023,917
  1,127,674
  1,236,156
  1,349,361
  1,467,323
  1,590,105
  1,717,806
  1,850,556
  1,988,516
  2,131,879
  2,280,868
Total liabilities, $m
  16,711
  23,716
  33,909
  47,195
  64,073
  85,017
  110,453
  140,747
  176,193
  217,010
  263,339
  315,255
  372,766
  435,832
  504,374
  578,285
  657,445
  741,727
  831,015
  925,202
  1,024,204
  1,127,961
  1,236,443
  1,349,648
  1,467,610
  1,590,392
  1,718,093
  1,850,843
  1,988,803
  2,132,166
  2,281,155
Total equity, $m
  3,401
  4,961
  7,093
  9,873
  13,404
  17,785
  23,106
  29,443
  36,858
  45,396
  55,088
  65,948
  77,979
  91,172
  105,510
  120,971
  137,531
  155,162
  173,840
  193,543
  214,253
  235,958
  258,651
  282,333
  307,009
  332,694
  359,408
  387,177
  416,037
  446,028
  477,194
Total liabilities and equity, $m
  20,112
  28,677
  41,002
  57,068
  77,477
  102,802
  133,559
  170,190
  213,051
  262,406
  318,427
  381,203
  450,745
  527,004
  609,884
  699,256
  794,976
  896,889
  1,004,855
  1,118,745
  1,238,457
  1,363,919
  1,495,094
  1,631,981
  1,774,619
  1,923,086
  2,077,501
  2,238,020
  2,404,840
  2,578,194
  2,758,349
Debt-to-equity ratio
  4.829
  4.720
  4.740
  4.750
  4.760
  4.760
  4.770
  4.770
  4.770
  4.770
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
  4.780
Adjusted equity ratio
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173
  0.173

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  353
  38
  41
  31
  9
  -37
  -113
  -221
  -366
  -553
  -785
  -1,065
  -1,397
  -1,782
  -2,219
  -2,709
  -3,252
  -3,846
  -4,490
  -5,182
  -5,922
  -6,708
  -7,538
  -8,411
  -9,327
  -10,285
  -11,284
  -12,326
  -13,409
  -14,536
  -15,706
Depreciation, amort., depletion, $m
  1
  1
  1
  1
  2
  2
  3
  4
  5
  6
  7
  8
  10
  11
  13
  15
  17
  19
  22
  24
  27
  29
  32
  35
  38
  42
  45
  48
  52
  56
  60
Funds from operations, $m
  205
  38
  42
  32
  11
  -35
  -110
  -217
  -361
  -547
  -778
  -1,057
  -1,388
  -1,770
  -2,206
  -2,694
  -3,234
  -3,826
  -4,468
  -5,158
  -5,896
  -6,678
  -7,506
  -8,376
  -9,289
  -10,243
  -11,240
  -12,277
  -13,357
  -14,480
  -15,646
Change in working capital, $m
  -35
  124
  166
  217
  276
  342
  415
  495
  579
  666
  756
  847
  939
  1,030
  1,119
  1,207
  1,292
  1,376
  1,458
  1,538
  1,616
  1,694
  1,771
  1,848
  1,926
  2,004
  2,085
  2,167
  2,252
  2,340
  2,432
Cash from operations, $m
  240
  -86
  -125
  -185
  -264
  -377
  -525
  -712
  -940
  -1,213
  -1,534
  -1,905
  -2,326
  -2,800
  -3,324
  -3,900
  -4,527
  -5,202
  -5,926
  -6,696
  -7,512
  -8,372
  -9,276
  -10,224
  -11,214
  -12,248
  -13,324
  -14,444
  -15,609
  -16,820
  -18,078
Maintenance CAPEX, $m
  0
  0
  -1
  -1
  -1
  -2
  -2
  -3
  -4
  -5
  -6
  -7
  -8
  -10
  -11
  -13
  -15
  -17
  -19
  -22
  -24
  -27
  -29
  -32
  -35
  -38
  -42
  -45
  -48
  -52
  -56
New CAPEX, $m
  -318
  -1
  -1
  -2
  -2
  -3
  -3
  -4
  -5
  -5
  -6
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -19
Cash from investing activities, $m
  -5,816
  -1
  -2
  -3
  -3
  -5
  -5
  -7
  -9
  -10
  -12
  -14
  -16
  -18
  -20
  -23
  -25
  -28
  -31
  -34
  -37
  -41
  -43
  -47
  -50
  -54
  -59
  -62
  -66
  -71
  -75
Free cash flow, $m
  -5,576
  -87
  -127
  -188
  -268
  -381
  -531
  -719
  -948
  -1,223
  -1,546
  -1,918
  -2,342
  -2,818
  -3,345
  -3,923
  -4,552
  -5,230
  -5,957
  -6,730
  -7,549
  -8,412
  -9,320
  -10,271
  -11,265
  -12,302
  -13,382
  -14,507
  -15,676
  -16,891
  -18,153
Issuance/(repayment) of debt, $m
  1,115
  7,412
  10,193
  13,286
  16,879
  20,944
  25,436
  30,294
  35,446
  40,816
  46,330
  51,915
  57,511
  63,066
  68,542
  73,911
  79,159
  84,283
  89,287
  94,187
  99,002
  103,757
  108,481
  113,205
  117,961
  122,782
  127,701
  132,750
  137,960
  143,363
  148,989
Issuance/(repurchase) of shares, $m
  -61
  1,522
  2,092
  2,749
  3,521
  4,418
  5,434
  6,558
  7,781
  9,091
  10,476
  11,926
  13,428
  14,974
  16,557
  18,170
  19,811
  21,477
  23,168
  24,885
  26,633
  28,413
  30,231
  32,093
  34,003
  35,970
  37,998
  40,096
  42,269
  44,526
  46,873
Cash from financing (excl. dividends), $m  
  5,577
  8,934
  12,285
  16,035
  20,400
  25,362
  30,870
  36,852
  43,227
  49,907
  56,806
  63,841
  70,939
  78,040
  85,099
  92,081
  98,970
  105,760
  112,455
  119,072
  125,635
  132,170
  138,712
  145,298
  151,964
  158,752
  165,699
  172,846
  180,229
  187,889
  195,862
Total cash flow (excl. dividends), $m
  1
  8,847
  12,158
  15,847
  20,132
  24,981
  30,339
  36,133
  42,279
  48,684
  55,260
  61,923
  68,597
  75,223
  81,754
  88,158
  94,418
  100,529
  106,499
  112,343
  118,086
  123,758
  129,392
  135,027
  140,700
  146,450
  152,317
  158,339
  164,554
  170,998
  177,708
Retained Cash Flow (-), $m
  176
  -1,560
  -2,132
  -2,779
  -3,531
  -4,418
  -5,434
  -6,558
  -7,781
  -9,091
  -10,476
  -11,926
  -13,428
  -14,974
  -16,557
  -18,170
  -19,811
  -21,477
  -23,168
  -24,885
  -26,633
  -28,413
  -30,231
  -32,093
  -34,003
  -35,970
  -37,998
  -40,096
  -42,269
  -44,526
  -46,873
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
 
  7,287
  10,026
  13,068
  16,601
  20,563
  24,905
  29,575
  34,498
  39,593
  44,784
  49,997
  55,169
  60,249
  65,197
  69,988
  74,607
  79,052
  83,331
  87,457
  91,453
  95,345
  99,161
  102,934
  106,696
  110,480
  114,319
  118,243
  122,285
  126,473
  130,835
Discount rate, %
 
  13.20
  13.86
  14.55
  15.28
  16.04
  16.85
  17.69
  18.57
  19.50
  20.48
  21.50
  22.58
  23.71
  24.89
  26.14
  27.44
  28.81
  30.25
  31.77
  33.36
  35.02
  36.77
  38.61
  40.54
  42.57
  44.70
  46.93
  49.28
  51.75
  54.33
PV of cash for distribution, $m
 
  6,437
  7,733
  8,693
  9,400
  9,771
  9,786
  9,457
  8,828
  7,966
  6,951
  5,869
  4,795
  3,792
  2,903
  2,150
  1,541
  1,068
  715
  463
  289
  174
  101
  56
  30
  16
  8
  4
  2
  1
  0
Current shareholders' claim on cash, %
  100
  69.9
  49.7
  36.2
  26.9
  20.4
  15.8
  12.4
  9.9
  8.0
  6.5
  5.4
  4.5
  3.8
  3.2
  2.8
  2.4
  2.1
  1.8
  1.6
  1.4
  1.3
  1.1
  1.0
  0.9
  0.8
  0.7
  0.7
  0.6
  0.5
  0.5

Two Harbors Investment Corp. is a real estate investment trust. The Company is focused on investing in, financing and managing residential mortgage-backed securities (RMBS), mortgage servicing rights (MSR), commercial real estate and other financial assets (collectively known as target assets). Its investment objective is to provide attractive risk-adjusted total return to its stockholders over the long-term, primarily through dividends and secondarily through capital appreciation. The Company focuses on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and financing risk. The Company finances its RMBS and commercial real estate assets through short- and long-term borrowings structured as repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. It also finances its MSR through revolving credit facilities.

FINANCIAL RATIOS  of  Two Harbors Investment (TWO)

Valuation Ratios
P/E Ratio 10
Price to Sales 6.7
Price to Book 1
Price to Tangible Book
Price to Cash Flow 14.6
Price to Free Cash Flow -45.1
Growth Rates
Sales Growth Rate -12.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 156.5%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 206.9%
Total Debt to Equity 482.9%
Interest Coverage 4
Management Effectiveness
Return On Assets 2.7%
Ret/ On Assets - 3 Yr. Avg. 2.5%
Return On Total Capital 2.1%
Ret/ On T. Cap. - 3 Yr. Avg. 1.9%
Return On Equity 10.1%
Return On Equity - 3 Yr. Avg. 9.1%
Asset Turnover 0
Profitability Ratios
Gross Margin 41.6%
Gross Margin - 3 Yr. Avg. 57%
EBITDA Margin 91.8%
EBITDA Margin - 3 Yr. Avg. 72.2%
Operating Margin 69.4%
Oper. Margin - 3 Yr. Avg. 54.9%
Pre-Tax Margin 69.6%
Pre-Tax Margin - 3 Yr. Avg. 54.9%
Net Profit Margin 67.1%
Net Profit Margin - 3 Yr. Avg. 59.3%
Effective Tax Rate 3.6%
Eff/ Tax Rate - 3 Yr. Avg. -26.5%
Payout Ratio 94.1%

TWO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TWO stock intrinsic value calculation we used $526 million for the last fiscal year's total revenue generated by Two Harbors Investment. The default revenue input number comes from 2016 income statement of Two Harbors Investment. 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 TWO stock valuation model: a) initial revenue growth rate of 47.2% 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 13.2%, whose default value for TWO is calculated based on our internal credit rating of Two Harbors Investment, 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 Two Harbors Investment.
    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 TWO stock the variable cost ratio is equal to 20.9%.

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 TWO 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 Two Harbors Investment.

Corporate tax rate of 27% is the nominal tax rate for Two Harbors Investment. 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 TWO 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 TWO are equal to 0.4%.

Life of production assets of 2 years is the average useful life of capital assets used in Two Harbors Investment 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 TWO 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 - $3401 million for Two Harbors Investment - 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 349.159 million for Two Harbors Investment 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 Two Harbors Investment at the current share price and the inputted number of shares is $3.5 billion.

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Financial statements of TWO
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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