Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Ameresco (AMRC, Financial). The stock, which is currently priced at 29.96, recorded a gain of 5.72% in a day and a 3-month decrease of 30.82%. The stock's fair valuation is $51.89, 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 derived from historical trading multiples such as PE, PS, PB Ratios, and Price-to-Free-Cash-Flow, adjusted for the company's past performance and anticipated future results. This calculation aims to pinpoint the fair trading value of a stock, with the expectation that its price will gravitate around this estimate over time. A significant deviation from the GF Value Line suggests potential overvaluation or undervaluation, impacting future returns.
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 Ameresco should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of 1.07, and a five-year revenue/earnings decline of at least 5%. These indicators suggest that Ameresco, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Financial Health Indicators: Piotroski F-score and Altman Z-score
The Piotroski F-score is a nine-point system that evaluates a company's financial health across three areas: profitability, leverage and liquidity, and operating efficiency. Ameresco's low score of 2 raises red flags, suggesting potential weaknesses in these areas. Meanwhile, the Altman Z-score assesses the likelihood of bankruptcy. Ameresco's score of 1.07 falls below the distress threshold, indicating a high risk of financial distress and questioning the company's stability.
A Closer Look at Ameresco Inc (AMRC, Financial)
Ameresco Inc provides comprehensive energy efficiency solutions, focusing on reducing energy and maintenance costs for various institutional, commercial, and industrial entities. The company also distributes solar energy products and systems. With a majority of revenue derived from the U.S. Regions segment, Ameresco's business is a significant player in the North American and European markets. However, the company's current stock price compared to its GF Value raises questions about its true valuation and potential as a value investment.
Analysis of Ameresco's Profitability
Delving into Ameresco's financial health, the company's return on assets (ROA) has declined over the past three years, with percentages of 3.61 in 2021, 4.16 in 2022, and 1.52 in 2023. This decreasing trend is a concern, as it suggests a weakening in the company's ability to generate profits from its assets. Additionally, the discrepancy between Ameresco's cash flow from operations at $-105.54 million and a higher net income of $46.67 million over the TTM period is a potential red flag, indicating possible issues with the quality of earnings and the sustainability of operations.
Leverage, Liquidity, and Source of Funds: A Worrying Trend
Ameresco's debt-to-total assets ratio has seen an alarming increase, from 0.23 in 2021 to 0.43 in 2023. This rising debt ratio implies a growing reliance on debt for financing, which heightens financial risk. Moreover, the company's current ratio has also been on a downward trend, moving from 1.44 in 2021 to 1.17 in 2023. This decline indicates a potential issue with Ameresco's liquidity and its capacity to meet short-term obligations.
Operating Efficiency: A Darker Picture
Ameresco has experienced an increase in its Diluted Average Shares Outstanding, from 52.84 in 2021 to 53.30 in 2023. This issuance of additional shares can dilute the value of existing shares if earnings do not grow proportionately. Furthermore, the company's asset turnover has decreased from 0.61 in 2021 to 0.41 in 2023, indicating a drop in how effectively Ameresco is using its assets to generate sales.
Ameresco's Low Altman Z-Score: A Breakdown of Key Drivers
The declining EBIT to Total Assets ratio, from 0.05 in 2021 to 0.02 in 2023, points to a potential lack of asset utilization in generating operational profits. Alongside this, the decreasing asset turnover ratio further emphasizes the need for Ameresco to improve its operational strategies to enhance asset usage and sales performance.
Conclusion: Is Ameresco a Value Trap?
While Ameresco's stock price seems undervalued compared to its GF Value, the concerning financial indicators, such as low Piotroski F-score and Altman Z-score, suggest that it might be a value trap. These warning signs, coupled with declining profitability, rising debt, and operational inefficiencies, warrant caution for investors considering Ameresco as a value investment. It is essential to conduct comprehensive due diligence and consider these risk factors before making an investment decision.
GuruFocus Premium members can find stocks with high Piotroski F-scores using the Piotroski F-score screener. Additionally, those seeking companies with high Altman Z-Scores can use the Walter Schloss Screen.
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.
