Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Mallinckrodt PLC (MNK, Financial). The stock, which is currently priced at 0.5, recorded a loss of 15.82% in a day and a 3-month decrease of 83.83%. The stock's fair valuation is $9.51, as indicated by its GF Value.
Understanding 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.
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 Mallinckrodt PLC should not be ignored. These risks are primarily reflected through its low Altman Z-score of -0.71. These indicators suggest that Mallinckrodt PLC, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Altman Z-Score: A Financial Health Indicator
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.
The Company: Mallinckrodt PLC
Mallinckrodt PLC develops, manufactures, markets, and distributes specialty pharmaceutical products and therapies. Its areas of focus include autoimmune and rare diseases in specialty areas like neurology, rheumatology, nephrology, pulmonology and ophthalmology; immunotherapy and neonatal respiratory critical care therapies; analgesics and gastrointestinal products. The company operates its business in two reportable segments namely Specialty Brands which include specialty pharmaceutical brands; and Specialty Generics which includes niche specialty generic drugs and active pharmaceutical ingredients. It generates maximum revenue from the Specialty Brands segment. Geographically, it derives a majority of its revenue from the United States.
Mallinckrodt PLC's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Mallinckrodt PLC's Altman Z-score reveals Mallinckrodt PLC's financial health may be weak, suggesting possible financial distress:
Conclusion
Despite its seemingly attractive valuation, the financial indicators suggest that Mallinckrodt PLC might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
