Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Clarivate PLC (CLVT, Financial). The stock, which is currently priced at 6.73, recorded a loss of 6.79% in a day and a 3-month decrease of 27.94%. The stock's fair valuation is $21.56, 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:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. Future estimates of the business performance.
Risks Associated with Clarivate PLC
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 Clarivate PLC should not be ignored. These risks are primarily reflected through its low Altman Z-score of -0.94. These indicators suggest that Clarivate PLC, 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, 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 Introduction
Clarivate PLC is an information, analytics, and workflow solutions company. It operates in three segments: Academia and Government; Life Sciences and Healthcare and Intellectual Property. The company generates maximum revenue from the Academia and Government segment. The A&G segment consists of Academia and Government product group, which drives research excellence across institutions, empower researchers to tackle today's global challenges and help academic institutions and libraries improve operational efficiency and effectiveness. Geographically, it derives a majority of its revenue from the Americas.
Clarivate PLC's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Clarivate PLC's Altman Z-score reveals Clarivate PLC'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 Clarivate PLC's historical data, 2021: -0.07; 2022: -0.08; 2023: -0.42, we observe a declining trend in this ratio. This downward movement indicates Clarivate PLC's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
When it comes to operational efficiency, a vital indicator for Clarivate PLC is its asset turnover. The data: 2021: 0.14; 2022: 0.12; 2023: 0.18 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 Clarivate PLC's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
Given these indicators, Clarivate PLC appears to be a potential value trap. Despite its seemingly attractive valuation, the company's declining retained earnings to total assets ratio and asset turnover suggest possible financial distress and reduced operational efficiency. Therefore, investors should exercise caution and conduct thorough due diligence before making investment decisions.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
