The stock of The GEO Group (NYSE:GEO, 30-year Financials) is believed to be 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 $7.75 per share and the market cap of $942.6 million, The GEO Group stock appears to be possible value trap. GF Value for The GEO Group is shown in the chart below.
The reason we think that The GEO Group stock might be a value trap is because The GEO Group has an Altman Z-score of 0.88, 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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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. The GEO Group has a cash-to-debt ratio of 0.09, which is in the middle range of the companies in REITs industry. The overall financial strength of The GEO Group is 3 out of 10, which indicates that the financial strength of The GEO Group is poor. This is the debt and cash of The GEO Group over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. The GEO Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.4 billion and earnings of $0.94 a share. Its operating margin is 10.37%, which ranks worse than 86% of the companies in REITs industry. Overall, the profitability of The GEO Group is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of The GEO Group over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. The GEO Group's 3-year average revenue growth rate is in the middle range of the companies in REITs industry. The GEO Group's 3-year average EBITDA growth rate is -2.9%, which ranks in the middle range of the companies in REITs industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, The GEO Group's ROIC is 5.29 while its WACC came in at 4.25. The historical ROIC vs WACC comparison of The GEO Group is shown below:
In conclusion, The stock of The GEO Group (NYSE:GEO, 30-year Financials) is estimated to be possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in REITs industry. To learn more about The GEO Group stock, you can check out its 30-year Financials here.
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