Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Charter Communications Inc (CHTR, Financial). The stock, which is currently priced at $436.91, recorded a loss of 1.86% in a day and a 3-month increase of 33.5%. The stock's fair valuation is $792.39, 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 three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
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 Charter Communications should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.76. 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.
What is the Altman Z-score?
Before delving into the details, let's understand what the Altman Z-score entails. 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.
Company Introduction
Charter Communications is the product of the 2016 merger of three cable companies, each with a decades-long history in the business: 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.
Charter Communications's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Charter Communications's Altman Z-score reveals Charter Communications'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 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. Consequently, it exerts a negative impact on its Z-Score.
Conclusion
Despite the seemingly attractive valuation of Charter Communications, the low Altman Z-Score and declining Retained Earnings to Total Assets ratio suggest potential financial distress. These factors indicate that the company might be a value trap, highlighting the importance of thorough due diligence in investment decision-making.
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