Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Carvana Co (CVNA, Financial). The stock, which is currently priced at 49.35, recorded a gain of 5.08% in a day and a 3-month increase of 153.49%. The stock's fair valuation is $129.41, 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.
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 Carvana Co should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.97. These indicators suggest that Carvana Co, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Demystifying the Altman Z-score
Before delving into the details, let's understand what the Altman Z-score entails. 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.
Company Snapshot: Carvana Co
Carvana Co is an e-commerce platform for buying and selling used cars. The company derives revenue from used vehicle sales, wholesale vehicle sales and other sales and revenues. The other sales and revenues include sales of loans originated and sold in securitization transactions or to financing partners, commissions received on VSCs and sales of GAP waiver coverage. The foundation of the business is retail vehicle unit sales. This drives the majority of the revenue and allows the company to capture additional revenue streams associated with financing, VSCs, auto insurance and GAP waiver coverage, as well as trade-in vehicles.
Carvana Co's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Carvana Co's Altman Z-score reveals Carvana Co's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Carvana Co's historical data, 2021: -0.08; 2022: -0.09; 2023: -0.29, we observe a declining trend in this ratio. This downward movement indicates Carvana Co's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
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 Carvana Co's EBIT to Total Assets ratio from historical data (2021: -0.01; 2022: -0.09; 2023: -0.22) indicates a descending trend. This reduction suggests that Carvana Co 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 Carvana Co is its asset turnover. The data: 2021: 2.69; 2022: 2.09; 2023: 1.30 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 Carvana Co's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
Given the low Altman Z-score and the declining trends in key financial ratios, Carvana Co appears to be a potential value trap. Despite its attractive valuation, the company's financial health appears to be weak, suggesting possible financial distress. Therefore, investors should exercise caution and conduct thorough due diligence before making an investment decision.
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