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 $12.89, recorded a loss of 7.07% in a day and a 3-month decrease of 7.86%. The stock's fair valuation is $35.04, 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 historical multiples such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, an adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line is the fair value that the stock should be traded at, and the stock price will most likely fluctuate around this line. If the stock price is significantly above the GF Value Line, it is overvalued, while if it is significantly below, its future return will likely be higher.
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 Sunrun should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of -0.11, and a five-year revenue/earnings decline of at least 5%. These indicators suggest that Sunrun, 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 tool used to assess the strength of a company's financial health. It is based on nine criteria that fall into three categories: profitability, leverage/liquidity/source of funds, and operating efficiency. Sunrun's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
The Altman Z-score predicts the probability of a company entering bankruptcy within two years. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk. Sunrun's negative Z-score of -0.11 is particularly concerning, as it signals a high probability of financial distress.
Snapshot of Sunrun's Business Operations
Sunrun Inc is engaged in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. The company acquires customers directly and through relationships with various solar and strategic partners. Sunrun constructs solar systems either by itself or through partners and owns the systems. Customers typically enter into 20- to 25-year agreements to utilize Sunrun's solar energy systems. Sunrun also sells solar energy systems and products, and solar leads generated to customers. Despite the company's significant market cap of $2.80 billion and sales of $2.40 billion, certain financial metrics raise concerns about its valuation.
Analysis of Sunrun's Profitability
Profitability is a crucial aspect of a company's financial health. Sunrun's negative return on assets (ROA) over the past three years, with figures such as 2021: -1.57%, 2022: 0.42%, and 2023: -6.07%, indicates the company's inability to profit from its assets. Furthermore, the discrepancy between the cash flow from operations at $-1009.41 million and net income at $-1191.35 million over the trailing twelve months (TTM) is a red flag according to the Piotroski F-score.
Leverage, Liquidity, and Source of Funds: A Worrying Trend
Sunrun's increasing debt-to-total assets ratio, with figures such as 2021: 40%, 2022: 45%, and 2023: 53%, indicates escalating financial risk and is viewed negatively by the Piotroski F-score.
Operating Efficiency: A Darker Picture
Sunrun's increase in Diluted Average Shares Outstanding over the past three years, with figures such as 2021: 213.02 million, 2022: 220.85 million, and 2023: 217.34 million, suggests potential dilution of shareholder value. Additionally, the decrease in gross margin percentage and asset turnover in the same period, with figures such as 2021: 16.81%, 2022: 13.24%, and 2023: 7.80% for gross margin, and 2021: 0.11, 2022: 0.12, and 2023: 0.12 for asset turnover, further highlight concerns about the company's profitability and operational efficiency.
Sunrun's Low Altman Z-Score: A Breakdown of Key Drivers
Sunrun's Retained Earnings to Total Assets ratio, with figures such as 2021: 0.00, 2022: 0.01, and 2023: -0.05, and its EBIT to Total Assets ratio, with figures such as 2021: -0.04, 2022: -0.02, and 2023: -0.09, both show a declining trend. These factors contribute to Sunrun's low Z-score and suggest potential financial distress.
Conclusion: The Value Trap Dilemma
While Sunrun Inc (RUN, Financial) may appear undervalued based on its GF Value, a closer look at its Piotroski F-score, Altman Z-score, profitability, leverage, liquidity, and operational efficiency paints a different picture. These concerning financial indicators suggest that Sunrun could be a value trap, warranting caution from investors. Before considering an investment in Sunrun, it is essential to conduct thorough research and consider whether the potential rewards outweigh the risks.
GuruFocus Premium members can find stocks with high Piotroski F-scores using the Piotroski F-score screener, and stocks with high Altman Z-Scores using 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.
