Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Sunrun Inc (RUN, Financial). The stock, which is currently priced at $12.76, recorded a gain of 7.05% in a day and a 3-month decrease of 15.83%. The stock's fair valuation is $34.97, as indicated by its GF Value.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical trading multiples, an adjustment factor that accounts for the company's past performance, and future business performance estimates. Ideally, a stock's price will fluctuate around the GF Value Line, with prices significantly above suggesting overvaluation and those below indicating potential undervaluation.
However, a deeper analysis is crucial before making any investment decisions. Despite Sunrun's seemingly attractive valuation, risk factors such as a low Piotroski F-score of 2 and an Altman Z-score of -0.12 suggest that Sunrun might be a potential value trap. These indicators underscore the necessity of thorough due diligence in investment decision-making.
The Significance of Financial Scoring Systems
The Piotroski F-score is a scoring system designed to assess a company's financial health, with a range from 0 to 9. Sunrun's low score indicates potential financial instability. The Altman Z-score, on the other hand, predicts the likelihood of bankruptcy. A score below 1.8 suggests a high risk of financial distress, which is concerning for Sunrun's investors.
Company Overview and Financial Analysis
Sunrun is engaged in the residential solar energy sector in the United States. The company's stock price is notably lower than its GF Value, prompting a closer examination of its financial health. The income breakdown of Sunrun can be seen in the chart below.
Analyzing Sunrun's Profitability
Profitability is a key factor in financial stability. Sunrun's negative Return on Assets (ROA) trend over the past three years, with figures of -1.57% in 2021, 0.42% in 2022, and -6.07% in 2023, raises concerns about its ability to profit from its assets. Additionally, discrepancies between cash flow from operations and net income suggest potential issues with earnings quality and operational sustainability.
Leverage, Liquidity, and Source of Funds: A Worrying Trend
Sunrun's increasing debt-to-total assets ratio over the past three years, with percentages of 0.40 in 2021, 0.45 in 2022, and 0.53 in 2023, indicates a growing reliance on debt financing, which heightens financial risk and warrants investor caution.
Operating Efficiency: A Darker Picture
The increase in Sunrun's Diluted Average Shares Outstanding over the past three years, with figures of 213.02 in 2021, 220.85 in 2022, and 217.34 in 2023, points to share dilution and potential value reduction for existing shareholders. Furthermore, declining gross margins and asset turnover ratios suggest challenges in cost management and asset utilization, which could impact profitability and operational efficiency.
While the Piotroski F-score is not the sole determinant of an investment's merit, it is a comprehensive tool for evaluating financial health. Unfortunately for Sunrun, its low score, in conjunction with other financial indicators, signals potential difficulties that cannot be overlooked by prudent investors.
Sunrun's Low Altman Z-Score: A Breakdown of Key Drivers
Sunrun's alarming Altman Z-score suggests a precarious financial state that could lead to potential distress. This is a critical aspect for investors to consider, as it may foreshadow future challenges for the company.
Conclusion
Despite its attractive price compared to the GF Value, Sunrun presents several financial red flags that may classify it as a value trap. The combination of a low Piotroski F-score, a negative Altman Z-score, and deteriorating financial metrics should prompt investors to exercise caution and conduct thorough research before considering an investment in Sunrun.
For GuruFocus Premium members seeking sound investments, the Piotroski F-score screener and the Walter Schloss Screen are valuable resources for identifying stocks with strong financial health and avoiding potential value traps.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
