Using the Earnings Power Value framework with a WACC of 6.8% and normalized earnings of $1.8B, AvalonBay Communities, Inc. has a fair value of $119.63 per share. The EPV range is $86.36 – $171.75 based on WACC sensitivity (5.3% – 8.3%).
| Low | Selected | High | |
|---|---|---|---|
| Normalized Earnings | 1,776 | 1,776 | 1,776 |
| (/) WACC | 8.3% | 6.8% | 5.3% |
| Enterprise Value | 21,404 | 26,128 | 33,529 |
| (-) Net debt | 9,141 | 9,141 | 9,141 |
| Equity Value | 12,262 | 16,987 | 24,387 |
| (/) Outstanding shares | 142 | 142 | 142 |
| Fair Price | $86.36 | $119.63 | $171.75 |
Earnings Power Value (EPV) estimates what a company is worth based on its current normalized earnings, assuming zero growth. It values the business as a perpetuity: Normalized Earnings / WACC. This gives a conservative floor value — the company's worth if it never grows but maintains its current profitability.
The model normalizes earnings by: (1) using sustainable gross margins (5-year average) applied to current revenue, (2) deducting maintenance-level operating expenses (average R&D + SG&A as % of revenue), (3) applying the average effective tax rate, and (4) subtracting the average excess of CapEx over D&A (net reinvestment needed to maintain current capacity).
EPV is most useful as a comparison anchor: if the market price is below EPV, the stock may be undervalued even without any growth. If market price exceeds EPV, the premium reflects growth expectations — which may or may not materialize.