The stock of Vistra (NYSE:VST, 30-year Financials) shows every sign of being 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 $17.5 per share and the market cap of $8.4 billion, Vistra stock shows every sign of being possible value trap. GF Value for Vistra is shown in the chart below.
The reason we think that Vistra stock might be a value trap is because Vistra has an Altman Z-score of 0.93, 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.
Link: These companies may deliever higher future returns at reduced risk.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Vistra has a cash-to-debt ratio of 0.04, which is worse than 87% of the companies in the industry of Utilities - Independent Power Producers. GuruFocus ranks the overall financial strength of Vistra at 4 out of 10, which indicates that the financial strength of Vistra is poor. This is the debt and cash of Vistra over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Vistra has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $11.4 billion and earnings of $1.29 a share. Its operating margin is 16.39%, which ranks in the middle range of the companies in the industry of Utilities - Independent Power Producers. Overall, the profitability of Vistra is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Vistra over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Vistra is 22.4%, which ranks better than 86% of the companies in the industry of Utilities - Independent Power Producers. The 3-year average EBITDA growth is 31.7%, which ranks better than 88% of the companies in the industry of Utilities - Independent Power Producers.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Vistra's return on invested capital is 5.26, and its cost of capital is 5.02. The historical ROIC vs WACC comparison of Vistra is shown below:
In conclusion, Vistra (NYSE:VST, 30-year Financials) stock is believed to be possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 88% of the companies in the industry of Utilities - Independent Power Producers. To learn more about Vistra stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
