Rubis Hybrid Valuation of Avatar Holdings

By: Steve Rubis

At Stock Research, equity valuation is the center of our investment analysis. An article we wrote a few weeks back discussed the problems of equity valuation. Currently, analysts calculate a myriad of values and then compare them to validate, or develop a fair value range. The problem is that this method seems to value a component of the company rather than the entire entity. It is our belief that investors should seek to evaluate a company as a whole, and this entails a valuation that adds assets, equity and net income together. These are the three most important components when generating share holder value of any successful company.

Let us now present the hybrid valuation of Avatar Holdings. The process involves calculating the Weighted Average Cost of Capital; generating the Returns on Assets, Equity and Net Income each for five years in the future; then discounting them to the present; adding the values, and then determining a per share value.


Table 1: Rubis Hybrid Value Inputs



The first input is the Weighted Average Cost of Capital, since it will provide our discount rate for our expected returns on Assets, Equity, and Net Income. Readers should pay special attention to the outstanding Returns on Assets and Equity that AVTR provides. In order to proceed, investors must question whether these rates are sustainable. We believe that given the current climate for the Residential Construction Industry, the rates are not sustainable. Therefore, there is a five percent reduction in Asset growth per year, an eight percent decline in Equity, and a three percent decline in Net Income growth as well. These adjustments should create a more realistic picture of AVTR’s future (This approach is also quite conservative).

Table 2: Asset, Equity and Net Income Cash Flows for 5 Years



Above, we estimate the expected returns on Assets, Equity, and Net Income. These three components seem to be the most important value generators for any publicly traded company. It is our view, that adding these three cash flows is more illustrative than a typical Discounted Cash Flow (DCF) valuation.

Table 3: Per Share Hybrid Valuation of Avatar Holdings (AVTR)



The values in the chart above reflect the strong Returns on Assets and Equity provided by AVTR. The problem is that according to this analysis, investors are paying more for the assets than the true earnings power of the business. This begs the question, does the per share value calculated above accurately reflect the fair value of AVTR? We say yes given our calculations in our comparative analysis of Avatar Holdings and WCI Communities. That being said, it seems reasonable for investors to be suspect of the above valuation.

Nevertheless, the Rubis Hybrid Valuation seems to provide an interesting illustration of company value. At the same time, much work is needed on developing this valuation method.

*The author cannot be held responsible for any monies gained or lost through trades made based upon our analysis. This analysis and valuation is for informational and educational purposes.