Value-focused investors are always on the lookout for stocks trading below their intrinsic value. One stock that has caught the eye of many is Charter Communications Inc (CHTR, Financial). Currently priced at $455.73, this stock has experienced a 1.74% gain in a single day and a 3-month increase of 33.55%. The stock's fair valuation, as indicated by its GF Value, is $791.59.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock, derived from our unique method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should trade. This value is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value at which the stock should trade. The stock price will most likely fluctuate around the GF Value Line. 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.
Risks Associated with Charter Communications
However, investors need to conduct a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Charter Communications Inc (CHTR, Financial) should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.77. These indicators suggest that Charter Communications, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
Before delving into the details, it's important to 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.
Charter Communications: A Snapshot
Charter Communications is the product of the 2016 merger of three cable companies, each with a decades-long history in the business: Legacy Charter, Time Warner Cable, and Bright House Networks. The firm now holds networks capable of providing television, internet access, and phone services to roughly 56 million U.S. homes and businesses, around 40% of the country. Across this footprint, Charter serves 30 million residential and 2 million commercial customer accounts under the Spectrum brand, making it the second-largest U.S. cable company behind Comcast. The firm also owns, in whole or in part, sports and news networks, including Spectrum SportsNet (long-term local rights to Los Angeles Lakers games), SportsNet LA (Los Angeles Dodgers), SportsNet New York (New York Mets), and Spectrum News NY1.
Charter Communications's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Charter Communications's Altman Z-score reveals Charter Communications'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 Charter Communications's historical data, 2021: -0.02; 2022: -0.07; 2023: -0.09, we observe a declining trend in this ratio. This downward movement indicates Charter Communications's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Conclusion
Given the low Altman Z-score and the downward trend in the Retained Earnings to Total Assets ratio, it appears that Charter Communications may be a value trap. Despite its attractive valuation, the potential financial distress indicated by these metrics means that investors should proceed with caution. Thorough due diligence is crucial when considering an investment in Charter Communications.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
