Intrinsic value of American Renal Associates Holdings - ARA

Previous Close

$15.56

  Intrinsic Value

$17.82

stock screener

  Rating & Target

hold

+14%

Previous close

$15.56

 
Intrinsic value

$17.82

 
Up/down potential

+14%

 
Rating

hold

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

We calculate the intrinsic value of ARA 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 0.5

 

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, %
  14.85
  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
  750
  765
  783
  803
  825
  850
  878
  908
  940
  975
  1,012
  1,052
  1,095
  1,140
  1,189
  1,240
  1,294
  1,352
  1,413
  1,477
  1,545
  1,617
  1,692
  1,772
  1,856
  1,944
  2,037
  2,135
  2,238
  2,346
  2,460
Variable operating expenses, $m
 
  587
  599
  613
  629
  646
  665
  686
  708
  732
  758
  729
  758
  790
  823
  859
  897
  936
  979
  1,023
  1,070
  1,120
  1,172
  1,227
  1,285
  1,346
  1,411
  1,479
  1,550
  1,625
  1,704
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
  628
  587
  599
  613
  629
  646
  665
  686
  708
  732
  758
  729
  758
  790
  823
  859
  897
  936
  979
  1,023
  1,070
  1,120
  1,172
  1,227
  1,285
  1,346
  1,411
  1,479
  1,550
  1,625
  1,704
Operating income, $m
  122
  178
  183
  189
  196
  204
  213
  222
  232
  242
  254
  323
  337
  351
  365
  381
  398
  416
  434
  454
  475
  497
  520
  545
  570
  598
  626
  656
  688
  721
  756
EBITDA, $m
  156
  238
  243
  249
  256
  264
  273
  282
  292
  303
  314
  327
  340
  354
  369
  385
  402
  420
  439
  459
  480
  502
  525
  550
  576
  604
  632
  663
  695
  729
  764
Interest expense (income), $m
  33
  28
  19
  20
  21
  23
  24
  26
  27
  29
  31
  33
  35
  38
  40
  43
  46
  49
  52
  56
  59
  63
  67
  71
  76
  81
  86
  91
  96
  102
  108
Earnings before tax, $m
  87
  150
  164
  169
  175
  181
  188
  196
  204
  213
  223
  290
  301
  313
  325
  338
  352
  367
  382
  398
  416
  434
  453
  473
  494
  517
  541
  565
  592
  619
  648
Tax expense, $m
  -1
  41
  44
  46
  47
  49
  51
  53
  55
  58
  60
  78
  81
  84
  88
  91
  95
  99
  103
  108
  112
  117
  122
  128
  134
  140
  146
  153
  160
  167
  175
Net income, $m
  0
  110
  120
  124
  128
  132
  138
  143
  149
  156
  163
  212
  220
  228
  237
  247
  257
  268
  279
  291
  303
  317
  331
  345
  361
  377
  395
  413
  432
  452
  473

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  101
  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
  986
  903
  924
  948
  974
  1,004
  1,036
  1,072
  1,110
  1,151
  1,195
  1,242
  1,293
  1,347
  1,404
  1,464
  1,528
  1,596
  1,668
  1,744
  1,824
  1,909
  1,998
  2,092
  2,191
  2,295
  2,405
  2,520
  2,642
  2,770
  2,905
Adjusted assets (=assets-cash), $m
  885
  903
  924
  948
  974
  1,004
  1,036
  1,072
  1,110
  1,151
  1,195
  1,242
  1,293
  1,347
  1,404
  1,464
  1,528
  1,596
  1,668
  1,744
  1,824
  1,909
  1,998
  2,092
  2,191
  2,295
  2,405
  2,520
  2,642
  2,770
  2,905
Revenue / Adjusted assets
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.846
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
  0.847
Average production assets, $m
  42
  43
  44
  45
  46
  48
  49
  51
  53
  55
  57
  59
  61
  64
  67
  69
  72
  76
  79
  83
  87
  91
  95
  99
  104
  109
  114
  120
  125
  131
  138
Working capital, $m
  56
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  9
  10
Total debt, $m
  570
  363
  382
  403
  427
  454
  483
  514
  549
  586
  626
  668
  714
  762
  813
  868
  925
  987
  1,051
  1,120
  1,192
  1,268
  1,348
  1,433
  1,522
  1,616
  1,714
  1,818
  1,928
  2,043
  2,164
Total liabilities, $m
  1,020
  813
  832
  853
  877
  904
  933
  964
  999
  1,036
  1,076
  1,118
  1,164
  1,212
  1,263
  1,318
  1,375
  1,437
  1,501
  1,570
  1,642
  1,718
  1,798
  1,883
  1,972
  2,066
  2,164
  2,268
  2,378
  2,493
  2,614
Total equity, $m
  -34
  90
  92
  95
  97
  100
  104
  107
  111
  115
  120
  124
  129
  135
  140
  146
  153
  160
  167
  174
  182
  191
  200
  209
  219
  230
  240
  252
  264
  277
  290
Total liabilities and equity, $m
  986
  903
  924
  948
  974
  1,004
  1,037
  1,071
  1,110
  1,151
  1,196
  1,242
  1,293
  1,347
  1,403
  1,464
  1,528
  1,597
  1,668
  1,744
  1,824
  1,909
  1,998
  2,092
  2,191
  2,296
  2,404
  2,520
  2,642
  2,770
  2,904
Debt-to-equity ratio
  -16.765
  4.020
  4.130
  4.250
  4.380
  4.520
  4.660
  4.800
  4.950
  5.090
  5.230
  5.380
  5.520
  5.660
  5.790
  5.930
  6.060
  6.180
  6.300
  6.420
  6.530
  6.640
  6.750
  6.850
  6.950
  7.040
  7.130
  7.210
  7.300
  7.380
  7.450
Adjusted equity ratio
  -0.153
  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
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  0
  110
  120
  124
  128
  132
  138
  143
  149
  156
  163
  212
  220
  228
  237
  247
  257
  268
  279
  291
  303
  317
  331
  345
  361
  377
  395
  413
  432
  452
  473
Depreciation, amort., depletion, $m
  34
  60
  60
  60
  60
  60
  60
  60
  60
  60
  60
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
Funds from operations, $m
  186
  169
  179
  183
  188
  192
  198
  203
  209
  216
  223
  215
  223
  232
  241
  251
  261
  272
  283
  295
  308
  322
  336
  351
  367
  383
  401
  419
  439
  459
  481
Change in working capital, $m
  14
  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 operations, $m
  172
  169
  179
  183
  188
  192
  198
  203
  209
  216
  223
  215
  223
  232
  241
  250
  261
  272
  283
  295
  308
  321
  336
  351
  366
  383
  401
  419
  438
  459
  480
Maintenance CAPEX, $m
  0
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
New CAPEX, $m
  -61
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
Cash from investing activities, $m
  -66
  -3
  -3
  -3
  -3
  -4
  -5
  -5
  -5
  -5
  -5
  -5
  -5
  -6
  -7
  -7
  -7
  -7
  -7
  -8
  -9
  -9
  -9
  -9
  -11
  -11
  -11
  -11
  -13
  -13
  -13
Free cash flow, $m
  106
  166
  176
  180
  184
  188
  193
  199
  205
  211
  218
  210
  217
  226
  235
  244
  254
  264
  275
  287
  300
  313
  326
  341
  356
  372
  389
  407
  426
  446
  467
Issuance/(repayment) of debt, $m
  -145
  -159
  19
  21
  24
  27
  29
  32
  34
  37
  40
  43
  45
  48
  51
  54
  58
  61
  65
  68
  72
  76
  80
  85
  89
  94
  99
  104
  109
  115
  121
Issuance/(repurchase) of shares, $m
  175
  68
  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  
  -66
  -91
  19
  21
  24
  27
  29
  32
  34
  37
  40
  43
  45
  48
  51
  54
  58
  61
  65
  68
  72
  76
  80
  85
  89
  94
  99
  104
  109
  115
  121
Total cash flow (excl. dividends), $m
  40
  75
  195
  201
  208
  215
  223
  231
  239
  248
  258
  252
  263
  274
  286
  298
  312
  325
  340
  355
  372
  389
  407
  425
  445
  466
  488
  511
  535
  561
  588
Retained Cash Flow (-), $m
  -95
  -177
  -2
  -2
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -13
Prev. year cash balance distribution, $m
 
  53
  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
 
  -50
  193
  199
  205
  212
  219
  227
  235
  244
  253
  247
  258
  269
  280
  292
  305
  319
  333
  348
  364
  380
  398
  416
  435
  456
  477
  500
  523
  548
  574
Discount rate, %
 
  10.20
  10.71
  11.25
  11.81
  12.40
  13.02
  13.67
  14.35
  15.07
  15.82
  16.61
  17.45
  18.32
  19.23
  20.20
  21.21
  22.27
  23.38
  24.55
  25.77
  27.06
  28.42
  29.84
  31.33
  32.90
  34.54
  36.27
  38.08
  39.99
  41.98
PV of cash for distribution, $m
 
  -45
  157
  144
  131
  118
  105
  93
  80
  69
  58
  46
  37
  30
  24
  19
  14
  10
  8
  5
  4
  2
  2
  1
  1
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

American Renal Associates Holdings, Inc. is a dialysis service provider in the United States focused on joint venture (JV) partnerships with physicians. As of December 31, 2016, the Company owned and operated 214 dialysis clinics in partnership with 379 nephrologist partners treating over 14,000 patients in 25 states and the District of Columbia. The Company operates its dialysis clinics exclusively through a JV model, in which it partners primarily with local nephrologists to develop, own and operate dialysis clinics, while the providers of the majority of dialysis services in the United States operate through a combination of subsidiaries and joint ventures. It provides patient care and clinical outcomes to patients suffering from end-stage renal disease (ESRD). Its clinics offer both in center and home dialysis options to meet the needs of patients. Its clinics primarily provide in center hemodialysis treatments and ancillary items and services.

FINANCIAL RATIOS  of  American Renal Associates Holdings (ARA)

Valuation Ratios
P/E Ratio 0
Price to Sales 0.6
Price to Book -14.1
Price to Tangible Book
Price to Cash Flow 2.8
Price to Free Cash Flow 4.3
Growth Rates
Sales Growth Rate 14.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 32.6%
Cap. Spend. - 3 Yr. Gr. Rate 9.9%
Financial Strength
Quick Ratio 2
Current Ratio 0
LT Debt to Equity -1535.3%
Total Debt to Equity -1676.5%
Interest Coverage 4
Management Effectiveness
Return On Assets 3.5%
Ret/ On Assets - 3 Yr. Avg. 5.2%
Return On Total Capital 0%
Ret/ On T. Cap. - 3 Yr. Avg. 2.2%
Return On Equity 0%
Return On Equity - 3 Yr. Avg. -8.6%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 39.6%
Gross Margin - 3 Yr. Avg. 40.3%
EBITDA Margin 20.5%
EBITDA Margin - 3 Yr. Avg. 25.8%
Operating Margin 16.3%
Oper. Margin - 3 Yr. Avg. 21.4%
Pre-Tax Margin 11.6%
Pre-Tax Margin - 3 Yr. Avg. 14.9%
Net Profit Margin 0%
Net Profit Margin - 3 Yr. Avg. 1.9%
Effective Tax Rate -1.1%
Eff/ Tax Rate - 3 Yr. Avg. 8%
Payout Ratio 0%

ARA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ARA stock intrinsic value calculation we used $750 million for the last fiscal year's total revenue generated by American Renal Associates Holdings. The default revenue input number comes from 2016 income statement of American Renal Associates Holdings. 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 ARA 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 10.2%, whose default value for ARA is calculated based on our internal credit rating of American Renal Associates Holdings, 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 American Renal Associates Holdings.
    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 ARA stock the variable cost ratio is equal to 76.9%.

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 ARA 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 5.3% for American Renal Associates Holdings.

Corporate tax rate of 27% is the nominal tax rate for American Renal Associates Holdings. 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 ARA 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 ARA are equal to 5.6%.

Life of production assets of 18 years is the average useful life of capital assets used in American Renal Associates Holdings 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 ARA is equal to 0.4%. 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 - $-34 million for American Renal Associates Holdings - 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 31.285 million for American Renal Associates Holdings 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 American Renal Associates Holdings at the current share price and the inputted number of shares is $0.5 billion.

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COMPANY NEWS

▶ American Renal Associates posts 3Q profit   [Nov-16-17 05:14AM  Associated Press]
▶ [$$] Insurers Press Dialysis Claims   [Sep-02-17 12:14AM  Barrons.com]
▶ American Renal Associates posts 2Q loss   [Aug-08-17 11:54PM  Associated Press]
▶ American Renal Associates posts 1Q loss   [May-09-17 06:56PM  Associated Press]
▶ American Renal Associates posts 4Q loss   [Mar-07-17 05:34PM  Associated Press]
▶ Here is What Hedge Funds Think About Novavax, Inc. (NVAX)   [Dec-07-16 05:30AM  at Insider Monkey]
Financial statements of ARA
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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