The stock of Washington Prime Group (NYSE:WPG, 30-year Financials) gives every indication of being possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock 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. At its current price of $2.46 per share and the market cap of $59.8 million, Washington Prime Group stock appears to be possible value trap. GF Value for Washington Prime Group is shown in the chart below.
The reason we think that Washington Prime Group stock might be a value trap is because its Piotroski F-score is only 3, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here. Furthermore, Washington Prime Group has an Altman Z-score of -0.26, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Washington Prime Group has a cash-to-debt ratio of 0.03, which ranks worse than 72% of the companies in REITs industry. Based on this, GuruFocus ranks Washington Prime Group's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Washington Prime Group over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Washington Prime Group has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $524.4 million and loss of $11 a share. Its operating margin is 4.38%, which ranks worse than 89% of the companies in REITs industry. Overall, the profitability of Washington Prime Group is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Washington Prime Group over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Washington Prime Group is -11.8%, which ranks worse than 87% of the companies in REITs industry. The 3-year average EBITDA growth rate is -42%, which ranks in the bottom 10% of the companies in REITs industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Washington Prime Group's return on invested capital is 0.57, and its cost of capital is 4.32. The historical ROIC vs WACC comparison of Washington Prime Group is shown below:
In closing, the stock of Washington Prime Group (NYSE:WPG, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in REITs industry. To learn more about Washington Prime Group stock, you can check out its 30-year Financials here.
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