Intrinsic value of Western Asset Mortgage Capital - WMC

Previous Close

$10.62

  Intrinsic Value

$4.64

stock screener

  Rating & Target

str. sell

-56%

  Value-price divergence*

-99%

Previous close

$10.62

 
Intrinsic value

$4.64

 
Up/down potential

-56%

 
Rating

str. sell

 
Value-price divergence*

-99%

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
  6.70
  6.53
  6.38
  6.24
  6.12
  6.00
  5.90
  5.81
  5.73
  5.66
  5.59
  5.53
  5.48
  5.43
  5.39
  5.35
  5.32
  5.28
  5.26
  5.23
  5.21
  5.19
  5.17
  5.15
  5.14
  5.12
  5.11
  5.10
  5.09
  5.08
Revenue, $m
  64
  68
  73
  77
  82
  87
  92
  98
  104
  110
  116
  122
  129
  136
  143
  151
  159
  168
  177
  186
  196
  206
  216
  228
  239
  252
  265
  278
  292
  307
  323
Variable operating expenses, $m
 
  80
  85
  91
  96
  102
  108
  115
  121
  128
  136
  143
  151
  159
  168
  177
  187
  197
  207
  218
  229
  241
  254
  267
  281
  295
  310
  326
  343
  360
  378
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
  80
  85
  91
  96
  102
  108
  115
  121
  128
  136
  143
  151
  159
  168
  177
  187
  197
  207
  218
  229
  241
  254
  267
  281
  295
  310
  326
  343
  360
  378
Operating income, $m
  -22
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -46
  -48
  -50
  -53
  -56
EBITDA, $m
  -22
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -46
  -48
  -50
  -53
  -56
Interest expense (income), $m
  32
  75
  80
  86
  93
  100
  108
  115
  123
  132
  140
  149
  159
  169
  179
  190
  201
  213
  225
  238
  252
  266
  281
  296
  313
  330
  348
  367
  387
  407
  429
Earnings before tax, $m
  -22
  -87
  -92
  -100
  -107
  -115
  -123
  -132
  -141
  -150
  -160
  -170
  -181
  -192
  -204
  -216
  -228
  -242
  -256
  -270
  -285
  -301
  -318
  -336
  -354
  -373
  -393
  -415
  -437
  -460
  -485
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
  -92
  -100
  -107
  -115
  -123
  -132
  -141
  -150
  -160
  -170
  -181
  -192
  -204
  -216
  -228
  -242
  -256
  -270
  -285
  -301
  -318
  -336
  -354
  -373
  -393
  -415
  -437
  -460
  -485

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
  3,252
  3,464
  3,685
  3,915
  4,154
  4,404
  4,664
  4,935
  5,218
  5,513
  5,821
  6,143
  6,480
  6,832
  7,200
  7,586
  7,989
  8,411
  8,853
  9,316
  9,801
  10,309
  10,842
  11,400
  11,986
  12,600
  13,243
  13,919
  14,627
  15,370
Adjusted assets (=assets-cash), $m
  3,110
  3,252
  3,464
  3,685
  3,915
  4,154
  4,404
  4,664
  4,935
  5,218
  5,513
  5,821
  6,143
  6,480
  6,832
  7,200
  7,586
  7,989
  8,411
  8,853
  9,316
  9,801
  10,309
  10,842
  11,400
  11,986
  12,600
  13,243
  13,919
  14,627
  15,370
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
  -49
  -52
  -56
  -59
  -63
  -66
  -70
  -75
  -79
  -83
  -88
  -93
  -98
  -103
  -109
  -115
  -121
  -127
  -134
  -141
  -148
  -156
  -164
  -172
  -181
  -190
  -200
  -210
  -221
  -232
Total debt, $m
  2,156
  2,282
  2,468
  2,662
  2,863
  3,073
  3,292
  3,520
  3,758
  4,006
  4,265
  4,535
  4,818
  5,113
  5,422
  5,745
  6,083
  6,436
  6,806
  7,194
  7,600
  8,025
  8,471
  8,938
  9,428
  9,941
  10,480
  11,045
  11,637
  12,258
  12,910
Total liabilities, $m
  2,726
  2,852
  3,038
  3,232
  3,433
  3,643
  3,862
  4,090
  4,328
  4,576
  4,835
  5,105
  5,388
  5,683
  5,992
  6,315
  6,653
  7,006
  7,376
  7,764
  8,170
  8,595
  9,041
  9,508
  9,998
  10,511
  11,050
  11,615
  12,207
  12,828
  13,480
Total equity, $m
  430
  400
  426
  453
  482
  511
  542
  574
  607
  642
  678
  716
  756
  797
  840
  886
  933
  983
  1,035
  1,089
  1,146
  1,206
  1,268
  1,334
  1,402
  1,474
  1,550
  1,629
  1,712
  1,799
  1,891
Total liabilities and equity, $m
  3,156
  3,252
  3,464
  3,685
  3,915
  4,154
  4,404
  4,664
  4,935
  5,218
  5,513
  5,821
  6,144
  6,480
  6,832
  7,201
  7,586
  7,989
  8,411
  8,853
  9,316
  9,801
  10,309
  10,842
  11,400
  11,985
  12,600
  13,244
  13,919
  14,627
  15,371
Debt-to-equity ratio
  5.014
  5.700
  5.790
  5.870
  5.950
  6.010
  6.080
  6.140
  6.190
  6.240
  6.290
  6.330
  6.380
  6.410
  6.450
  6.490
  6.520
  6.550
  6.580
  6.610
  6.630
  6.660
  6.680
  6.700
  6.720
  6.740
  6.760
  6.780
  6.800
  6.810
  6.830
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
  -92
  -100
  -107
  -115
  -123
  -132
  -141
  -150
  -160
  -170
  -181
  -192
  -204
  -216
  -228
  -242
  -256
  -270
  -285
  -301
  -318
  -336
  -354
  -373
  -393
  -415
  -437
  -460
  -485
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
  -92
  -100
  -107
  -115
  -123
  -132
  -141
  -150
  -160
  -170
  -181
  -192
  -204
  -216
  -228
  -242
  -256
  -270
  -285
  -301
  -318
  -336
  -354
  -373
  -393
  -415
  -437
  -460
  -485
Change in working capital, $m
  1
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
Cash from operations, $m
  12
  -84
  -89
  -96
  -104
  -112
  -120
  -128
  -137
  -146
  -156
  -166
  -176
  -187
  -198
  -210
  -223
  -236
  -249
  -264
  -278
  -294
  -310
  -328
  -346
  -364
  -384
  -405
  -427
  -449
  -473
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
  -84
  -89
  -96
  -104
  -112
  -120
  -128
  -137
  -146
  -156
  -166
  -176
  -187
  -198
  -210
  -223
  -236
  -249
  -264
  -278
  -294
  -310
  -328
  -346
  -364
  -384
  -405
  -427
  -449
  -473
Issuance/(repayment) of debt, $m
  -431
  126
  186
  194
  202
  210
  219
  228
  238
  248
  259
  270
  283
  295
  309
  323
  338
  354
  370
  388
  406
  425
  446
  467
  490
  513
  538
  565
  592
  621
  652
Issuance/(repurchase) of shares, $m
  0
  103
  118
  127
  136
  145
  154
  164
  174
  185
  196
  208
  221
  233
  247
  261
  276
  291
  308
  325
  342
  361
  381
  401
  423
  445
  469
  494
  520
  547
  576
Cash from financing (excl. dividends), $m  
  -426
  229
  304
  321
  338
  355
  373
  392
  412
  433
  455
  478
  504
  528
  556
  584
  614
  645
  678
  713
  748
  786
  827
  868
  913
  958
  1,007
  1,059
  1,112
  1,168
  1,228
Total cash flow (excl. dividends), $m
  90
  145
  216
  224
  233
  243
  253
  264
  275
  287
  300
  313
  327
  342
  357
  374
  391
  409
  428
  449
  470
  492
  516
  541
  567
  594
  623
  654
  685
  719
  754
Retained Cash Flow (-), $m
  82
  -103
  -118
  -127
  -136
  -145
  -154
  -164
  -174
  -185
  -196
  -208
  -221
  -233
  -247
  -261
  -276
  -291
  -308
  -325
  -342
  -361
  -381
  -401
  -423
  -445
  -469
  -494
  -520
  -547
  -576
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
 
  88
  97
  97
  98
  98
  99
  100
  101
  102
  103
  105
  106
  108
  110
  113
  115
  118
  121
  124
  128
  131
  135
  140
  144
  149
  154
  160
  166
  172
  178
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
 
  77
  75
  64
  55
  46
  38
  31
  25
  20
  16
  12
  9
  7
  5
  3
  2
  2
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  79.3
  61.7
  47.9
  37.1
  28.7
  22.2
  17.2
  13.3
  10.3
  7.9
  6.1
  4.7
  3.6
  2.8
  2.1
  1.6
  1.3
  1.0
  0.7
  0.6
  0.4
  0.3
  0.3
  0.2
  0.1
  0.1
  0.1
  0.1
  0.1
  0.0

Western Asset Mortgage Capital Corporation is a real estate investment trust. The Company is focused on investing in, financing and managing a diversified portfolio of real estate-related securities, whole-loans and other financial assets. The Company's portfolio includes Agency residential mortgage-backed securities (RMBS), including Mortgage pass-through certificates, Agency derivatives, Agency Interest-Only Strips and Agency collateralized mortgage obligations (CMOs); Non-Agency RMBS, and Agency commercial mortgage-backed securities (CMBS), Non-Agency CMBS, Non United States CMBS and asset-backed securities (ABS), as well as Residential and Commercial Whole-Loans. The Company may utilize to-be-announced forward contracts (TBAs), in order to invest in Agency RMBS. The Company's manager is Western Asset Management Company.

FINANCIAL RATIOS  of  Western Asset Mortgage Capital (WMC)

Valuation Ratios
P/E Ratio -17.8
Price to Sales 7
Price to Book 1
Price to Tangible Book
Price to Cash Flow 37.1
Price to Free Cash Flow 37.1
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 6.7% 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 -71.9%. 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 41.801 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.

RELATED COMPANIES Price Int.Val. Rating
OAKS Five Oaks Inve 4.34 1.59  str.sell
MTGE MTGE Investmen 19.75 5.09  str.sell
TWO Two Harbors In 10.11 62.16  str.buy
EARN Ellington Resi 14.33 108.19  str.buy
ANH Anworth Mortga 6.06 9.56  str.buy
NLY Annaly Capital 12.29 3.69  str.sell
CIM Chimera Invest 19.14 57.98  str.buy

COMPANY NEWS

▶ Fear Grips Wall Street Again: 4 Ultra-Safe Bets   [Aug-14-17 09:41AM  Zacks]
▶ 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]
▶ FOMC Minutes Released: What's Weighing on the Fed?   [Jul-06-16 03:12PM  at Bloomberg]
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.

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.