Value-focused investors are constantly seeking stocks priced below their intrinsic value. Guardant Health Inc (GH, Financial) is one such stock that merits attention. Currently priced at 25.51, the stock recorded a loss of 2.3% in a day and a 3-month decrease of 30.07%. The fair valuation of the stock, as per its GF Value, is $99.16.
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 provides an overview of the fair value at which the stock should be traded. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, the GuruFocus 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 at which the stock should be traded. 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.
Guardant Health: A Potential Value Trap?
Despite its seemingly attractive valuation, certain risk factors associated with Guardant Health should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.01. These indicators suggest that Guardant Health, 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
Invented by New York University Professor Edward I. Altman in 1968, the Z-Score 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.
Guardant Health: A Company Overview
Guardant Health, based in Redwood City, California, provides cancer blood tests and analytics for clinical and research use, and maintains research partnerships with large biopharmaceutical companies. The company offers Guardant 360, a blood-based (liquid biopsy) test for treatment selection in advanced stage cancer, and Guardant Omni, a broader gene panel for immuno-oncology research. The company's pipeline includes Guardant Reveal (formerly Lunar-1), for cancer recurrence detection in survivors, and Lunar-2, a liquid biopsy for early detection of cancer in higher-risk individuals, with an initial focus on colorectal cancer.
Guardant Health's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Guardant Health's Altman Z-score reveals that the company's financial health may be weak, suggesting possible financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Guardant Health's historical data, 2021: -0.35; 2022: -0.73; 2023: -1.02, we observe a declining trend in this ratio. This downward movement indicates Guardant Health's diminishing ability to reinvest in its business or effectively manage its debt, consequently exerting a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Guardant Health's EBIT to Total Assets ratio from historical data (2021: -0.16; 2022: -0.29; 2023: -0.27) indicates a descending trend. This reduction suggests that Guardant Health might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Conclusion: Is Guardant Health a Value Trap?
Despite its seemingly attractive valuation, Guardant Health's low Altman Z-Score and other financial indicators suggest that it could be a potential value trap. Investors should therefore exercise caution and conduct thorough due diligence before making an investment decision. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
