Value-focused investors are constantly seeking stocks that are priced below their intrinsic value. One such stock that merits attention is Charter Communications Inc (CHTR, Financial). Currently priced at $422.32, the stock recorded a day's loss of 3.61% and a three-month increase of 28.75%. However, its fair valuation, as indicated by the GF Value, is $790.
Understanding the 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 provides an overview of the fair value at which the stock should ideally be traded. This value is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Charter Communications (CHTR, Financial): A Closer Look
Despite its seemingly attractive valuation, certain risk factors associated with Charter Communications (CHTR) should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.75. These indicators suggest that Charter Communications, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
The Altman Z-Score, invented by New York University Professor Edward I. Altman in 1968, is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Charter Communications Inc (CHTR, Financial)
Charter Communications is the product of the 2016 merger of three cable companies: Legacy Charter, Time Warner Cable, and Bright House Networks. The firm now holds networks capable of providing television, internet access, and phone services to roughly 56 million U.S. homes and businesses, around 40% of the country. Across this footprint, Charter serves 30 million residential and 2 million commercial customer accounts under the Spectrum brand, making it the second-largest U.S. cable company behind Comcast.
Despite its expansive operations, Charter Communications's financial health may be weak, as suggested by its low Altman Z-score. A dissection of this score reveals key drivers that potential investors should consider.
Charter Communications's Low Altman Z-Score: Key Drivers
The Retained Earnings to Total Assets ratio provides insights into a company's ability to reinvest its profits or manage debt. Evaluating Charter Communications's historical data, 2021: -0.02; 2022: -0.07; 2023: -0.09, we observe a declining trend in this ratio. This downward movement indicates Charter Communications's diminishing ability to reinvest in its business or effectively manage its debt, exerting a negative impact on its Z-Score.
Conclusion: Charter Communications (CHTR, Financial) - A Potential Value Trap
Despite its seemingly low market valuation, Charter Communications's financial health indicators suggest potential financial distress. This complexity, coupled with its low Altman Z-Score, suggests that Charter Communications might be a potential value trap. Therefore, thorough due diligence is essential before making an investment decision.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
