Intrinsic value of Western Asset Mortgage Capital - WMC

Previous Close

$10.55

  Intrinsic Value

$2.56

stock screener

  Rating & Target

str. sell

-76%

  Value-price divergence*

0%

Previous close

$10.55

 
Intrinsic value

$2.56

 
Up/down potential

-76%

 
Rating

str. sell

 
Value-price divergence*

0%

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

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

We calculate the intrinsic value of WMC 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 0.4

 

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, %
  6.67
  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
  64
  65
  67
  68
  70
  73
  75
  77
  80
  83
  86
  90
  93
  97
  101
  106
  110
  115
  121
  126
  132
  138
  144
  151
  158
  166
  174
  182
  191
  200
  210
Variable operating expenses, $m
 
  77
  78
  80
  83
  85
  88
  91
  94
  97
  101
  105
  110
  114
  119
  124
  129
  135
  141
  148
  155
  162
  169
  177
  186
  194
  204
  214
  224
  235
  246
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
  86
  77
  78
  80
  83
  85
  88
  91
  94
  97
  101
  105
  110
  114
  119
  124
  129
  135
  141
  148
  155
  162
  169
  177
  186
  194
  204
  214
  224
  235
  246
Operating income, $m
  -22
  -11
  -11
  -12
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
EBITDA, $m
  -22
  -11
  -11
  -12
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
Interest expense (income), $m
  32
  75
  75
  78
  80
  83
  86
  90
  93
  97
  102
  106
  111
  117
  122
  128
  135
  142
  149
  156
  164
  173
  182
  191
  201
  211
  223
  234
  246
  259
  273
Earnings before tax, $m
  -22
  -87
  -87
  -89
  -92
  -95
  -99
  -103
  -107
  -112
  -117
  -122
  -127
  -133
  -140
  -147
  -154
  -161
  -169
  -178
  -187
  -196
  -207
  -217
  -228
  -240
  -252
  -265
  -279
  -294
  -309
Tax expense, $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
Net income, $m
  -25
  -87
  -87
  -89
  -92
  -95
  -99
  -103
  -107
  -112
  -117
  -122
  -127
  -133
  -140
  -147
  -154
  -161
  -169
  -178
  -187
  -196
  -207
  -217
  -228
  -240
  -252
  -265
  -279
  -294
  -309

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  46
  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
  3,156
  3,109
  3,180
  3,262
  3,354
  3,455
  3,567
  3,688
  3,820
  3,961
  4,113
  4,276
  4,450
  4,634
  4,831
  5,039
  5,260
  5,494
  5,741
  6,002
  6,278
  6,569
  6,876
  7,199
  7,540
  7,899
  8,277
  8,675
  9,093
  9,534
  9,997
Adjusted assets (=assets-cash), $m
  3,110
  3,109
  3,180
  3,262
  3,354
  3,455
  3,567
  3,688
  3,820
  3,961
  4,113
  4,276
  4,450
  4,634
  4,831
  5,039
  5,260
  5,494
  5,741
  6,002
  6,278
  6,569
  6,876
  7,199
  7,540
  7,899
  8,277
  8,675
  9,093
  9,534
  9,997
Revenue / Adjusted assets
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
  0.021
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
  -7
  -7
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
Total debt, $m
  2,156
  2,156
  2,219
  2,291
  2,371
  2,460
  2,558
  2,665
  2,780
  2,904
  3,037
  3,180
  3,332
  3,494
  3,667
  3,849
  4,043
  4,248
  4,465
  4,694
  4,936
  5,191
  5,460
  5,744
  6,043
  6,357
  6,689
  7,038
  7,405
  7,791
  8,197
Total liabilities, $m
  2,726
  2,726
  2,789
  2,861
  2,941
  3,030
  3,128
  3,235
  3,350
  3,474
  3,607
  3,750
  3,902
  4,064
  4,237
  4,419
  4,613
  4,818
  5,035
  5,264
  5,506
  5,761
  6,030
  6,314
  6,613
  6,927
  7,259
  7,608
  7,975
  8,361
  8,767
Total equity, $m
  430
  382
  391
  401
  412
  425
  439
  454
  470
  487
  506
  526
  547
  570
  594
  620
  647
  676
  706
  738
  772
  808
  846
  886
  927
  972
  1,018
  1,067
  1,118
  1,173
  1,230
Total liabilities and equity, $m
  3,156
  3,108
  3,180
  3,262
  3,353
  3,455
  3,567
  3,689
  3,820
  3,961
  4,113
  4,276
  4,449
  4,634
  4,831
  5,039
  5,260
  5,494
  5,741
  6,002
  6,278
  6,569
  6,876
  7,200
  7,540
  7,899
  8,277
  8,675
  9,093
  9,534
  9,997
Debt-to-equity ratio
  5.014
  5.640
  5.670
  5.710
  5.750
  5.790
  5.830
  5.870
  5.920
  5.960
  6.000
  6.050
  6.090
  6.130
  6.170
  6.210
  6.250
  6.290
  6.320
  6.360
  6.390
  6.420
  6.460
  6.490
  6.520
  6.540
  6.570
  6.600
  6.620
  6.640
  6.670
Adjusted equity ratio
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123
  0.123

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -25
  -87
  -87
  -89
  -92
  -95
  -99
  -103
  -107
  -112
  -117
  -122
  -127
  -133
  -140
  -147
  -154
  -161
  -169
  -178
  -187
  -196
  -207
  -217
  -228
  -240
  -252
  -265
  -279
  -294
  -309
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
  13
  -87
  -87
  -89
  -92
  -95
  -99
  -103
  -107
  -112
  -117
  -122
  -127
  -133
  -140
  -147
  -154
  -161
  -169
  -178
  -187
  -196
  -207
  -217
  -228
  -240
  -252
  -265
  -279
  -294
  -309
Change in working capital, $m
  1
  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
Cash from operations, $m
  12
  -87
  -87
  -89
  -92
  -95
  -99
  -103
  -107
  -111
  -116
  -121
  -127
  -133
  -139
  -146
  -153
  -161
  -169
  -177
  -186
  -196
  -206
  -216
  -228
  -239
  -252
  -265
  -278
  -293
  -308
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
  505
  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
  517
  -87
  -87
  -89
  -92
  -95
  -99
  -103
  -107
  -111
  -116
  -121
  -127
  -133
  -139
  -146
  -153
  -161
  -169
  -177
  -186
  -196
  -206
  -216
  -228
  -239
  -252
  -265
  -278
  -293
  -308
Issuance/(repayment) of debt, $m
  -431
  0
  63
  72
  80
  89
  98
  107
  115
  124
  133
  143
  152
  162
  172
  183
  194
  205
  217
  229
  242
  255
  269
  284
  299
  315
  331
  349
  367
  386
  406
Issuance/(repurchase) of shares, $m
  0
  -2
  96
  99
  104
  108
  113
  118
  123
  129
  135
  142
  149
  156
  164
  172
  181
  190
  200
  210
  221
  232
  244
  257
  270
  284
  299
  314
  331
  348
  366
Cash from financing (excl. dividends), $m  
  -426
  -2
  159
  171
  184
  197
  211
  225
  238
  253
  268
  285
  301
  318
  336
  355
  375
  395
  417
  439
  463
  487
  513
  541
  569
  599
  630
  663
  698
  734
  772
Total cash flow (excl. dividends), $m
  90
  -88
  72
  82
  92
  102
  112
  122
  132
  142
  152
  163
  174
  185
  197
  209
  221
  234
  248
  262
  276
  292
  308
  324
  342
  360
  379
  399
  419
  441
  464
Retained Cash Flow (-), $m
  82
  -85
  -96
  -99
  -104
  -108
  -113
  -118
  -123
  -129
  -135
  -142
  -149
  -156
  -164
  -172
  -181
  -190
  -200
  -210
  -221
  -232
  -244
  -257
  -270
  -284
  -299
  -314
  -331
  -348
  -366
Prev. year cash balance distribution, $m
 
  46
  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
 
  -85
  -24
  -18
  -12
  -6
  -1
  4
  9
  13
  17
  21
  25
  29
  33
  37
  40
  44
  48
  52
  55
  59
  63
  67
  71
  76
  80
  84
  89
  94
  98
Discount rate, %
 
  13.40
  14.07
  14.77
  15.51
  16.29
  17.10
  17.96
  18.86
  19.80
  20.79
  21.83
  22.92
  24.06
  25.27
  26.53
  27.86
  29.25
  30.71
  32.25
  33.86
  35.55
  37.33
  39.20
  41.16
  43.22
  45.38
  47.65
  50.03
  52.53
  55.16
PV of cash for distribution, $m
 
  -75
  -19
  -12
  -7
  -3
  0
  1
  2
  3
  3
  2
  2
  2
  1
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  80.5
  64.5
  51.6
  41.2
  32.8
  26.0
  20.6
  16.2
  12.8
  10.1
  7.9
  6.2
  4.8
  3.8
  2.9
  2.3
  1.8
  1.4
  1.1
  0.8
  0.6
  0.5
  0.4
  0.3
  0.2
  0.2
  0.1
  0.1
  0.1

Western Asset Mortgage Capital Corporation operates as a real estate investment trust in the United States. It primarily focuses on investing in, financing, and managing a portfolio of agency and non-agency residential mortgage-backed securities and commercial mortgage-backed securities, residential whole-loans, and other financial assets. The company qualifies as a real estate investment trust for federal income tax purposes. It generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders. The company was founded in 2009 and is based in Pasadena, California.

FINANCIAL RATIOS  of  Western Asset Mortgage Capital (WMC)

Valuation Ratios
P/E Ratio -17.7
Price to Sales 6.9
Price to Book 1
Price to Tangible Book
Price to Cash Flow 36.9
Price to Free Cash Flow 36.9
Growth Rates
Sales Growth Rate 6.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -100%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 501.4%
Total Debt to Equity 501.4%
Interest Coverage 0
Management Effectiveness
Return On Assets 0.3%
Ret/ On Assets - 3 Yr. Avg. 1.3%
Return On Total Capital -0.9%
Ret/ On T. Cap. - 3 Yr. Avg. 0.5%
Return On Equity -5.3%
Return On Equity - 3 Yr. Avg. 4.2%
Asset Turnover 0
Profitability Ratios
Gross Margin 32.8%
Gross Margin - 3 Yr. Avg. 49.8%
EBITDA Margin 15.6%
EBITDA Margin - 3 Yr. Avg. 41.3%
Operating Margin -34.4%
Oper. Margin - 3 Yr. Avg. 4.2%
Pre-Tax Margin -34.4%
Pre-Tax Margin - 3 Yr. Avg. 4.7%
Net Profit Margin -39.1%
Net Profit Margin - 3 Yr. Avg. 3.2%
Effective Tax Rate -13.6%
Eff/ Tax Rate - 3 Yr. Avg. -4.5%
Payout Ratio -276%

WMC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the WMC stock intrinsic value calculation we used $64 million for the last fiscal year's total revenue generated by Western Asset Mortgage Capital. The default revenue input number comes from 2016 income statement of Western Asset Mortgage Capital. 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 WMC 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 13.4%, whose default value for WMC is calculated based on our internal credit rating of Western Asset Mortgage Capital, 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 Western Asset Mortgage Capital.
    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 WMC stock the variable cost ratio is equal to 117.2%.

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 WMC 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 Western Asset Mortgage Capital.

Corporate tax rate of 27% is the nominal tax rate for Western Asset Mortgage Capital. 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 WMC 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 WMC are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in Western Asset Mortgage Capital 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 WMC is equal to -10%. 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 - $430 million for Western Asset Mortgage Capital - 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 42.042 million for Western Asset Mortgage Capital 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 Western Asset Mortgage Capital at the current share price and the inputted number of shares is $0.4 billion.

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COMPANY NEWS

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▶ Do Hedge Funds Love Western Asset Mortgage Capital Corp (WMC)?   [Dec-20-16 01:49PM  at Insider Monkey]
▶ Mortgage REITs Look Better as Yield Curve Steepens: 5 Picks   [Nov-28-16 05:30PM  at Barrons.com]
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▶ Are Muni Bonds Still a Good Bet in 2016?   [Apr-11-16 01:42PM  at TheStreet]
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Stock chart of WMC Financial statements of WMC
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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