Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Newell Brands Inc (NWL, Financial). The stock, currently priced at 9.04, recorded a gain of 3.79% in a day and a 3-month increase of 1.52%. The stock's fair valuation is $17.72, as indicated by its GF Value.
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 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.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price 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.
Unpacking the Risks of Newell Brands
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 Newell Brands should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.65. These indicators suggest that Newell Brands, 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
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.
A Closer Look at Newell Brands
Newell Brands Inc is an American global consumer goods company. The business activities of the group function through five segments namely, Commercial Solutions, Home Appliances, Home Solutions, Learning and Development, Outdoor and Recreation. The learning and Development segment generates most of the revenue for the firm which offers baby gear and infant care products; writing instruments, including markers and highlighters, pens and pencils; art products; activity-based adhesive and cutting products, and labeling solutions.
Breaking Down Newell Brands's Low Altman Z-Score
A dissection of Newell Brands's Altman Z-score reveals Newell Brands's financial health may be weak, suggesting possible financial distress:
Conclusion: Is Newell Brands a Value Trap?
Given the analysis, it's clear that while Newell Brands presents an attractive valuation, its low Altman Z-Score indicates potential financial distress. This raises concerns about its viability as a value investment, suggesting that it might indeed be a value trap. Therefore, investors should exercise caution and conduct thorough due diligence before considering an investment in Newell Brands.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
