Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is DISH Network Corp (DISH, Financial). The stock, which is currently priced at 6.24, recorded a gain of 3.83% in a day and a 3-month decrease of 16.08%. The stock's fair valuation is $27.61, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Unpacking the Risks: The Altman Z-Score
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with DISH Network should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.81. These indicators suggest that DISH Network, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
DISH Network: A Company Snapshot
From its founding in the 1980s, Dish Network has primarily focused on the satellite television business, capitalizing on technological advancements to expand its reach. The firm now serves 7 million U.S. customers. Dish launched an internet-based television offering under the Sling brand in 2015 and now serves about 2 million customers on this platform. Dish's future, however, hinges primarily on the wireless business.
The firm has amassed a large portfolio of spectrum licenses over the past 15 years, spending about $30 billion in the process, and is now building a nationwide wireless network. It acquired Sprint's prepaid business and now serves about 8 million customers. Dish plans to merge with EchoStar, a firm it spun out in 2008 that provides satellite-based communications services.
Breaking Down DISH Network's Low Altman Z-Score
A dissection of DISH Network's Altman Z-score reveals DISH Network's financial health may be weak, suggesting possible financial distress. The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of DISH Network's EBIT to Total Assets ratio from historical data (2021: 0.09; 2022: 0.06; 2023: 0.05) indicates a descending trend.
This reduction suggests that DISH Network might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score. When it comes to operational efficiency, a vital indicator for DISH Network is its asset turnover. The data: 2021: 0.49; 2022: 0.38; 2023: 0.31 from the past three years suggests a decreasing trend in this ratio.
The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in DISH Network's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion: Navigating the Value Trap
While DISH Network (DISH, Financial) appears to be undervalued based on its GF Value, the company's low Altman Z-score and declining operational efficiency ratios suggest potential financial distress. Therefore, despite the initial appeal, DISH Network may represent a value trap for investors. As always, thorough due diligence is essential before making any investment decision.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen.
