Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Kilroy Realty Corp (KRC, Financial). The stock, which is currently priced at 28.48, recorded a loss of 4.37% in a day and a 3-month decrease of 3.47%. The stock's fair valuation is $65.16, 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.
- 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. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Considering the Risks
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 Kilroy Realty should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.67. These indicators suggest that Kilroy Realty, 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.
Company Overview
Kilroy Realty is a premier owner and landlord of approximately 16 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust. Despite the company's impressive market cap of $3.30 billion and sales of $1.10 billion, its low Altman Z-score suggests potential financial distress. This juxtaposition of impressive company metrics with a low Z-score indicates the need for a more detailed analysis of the company's financial health.
Breaking Down Kilroy Realty's Low Altman Z-Score
A dissection of Kilroy Realty's Altman Z-score reveals Kilroy Realty's financial health may be weak, suggesting possible financial distress. 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 Kilroy Realty's EBIT to Total Assets ratio from historical data (2021: 0.07; 2022: 0.03; 2023: 0.03) indicates a recent dip following an initial rise. This reduction suggests that Kilroy Realty 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
Despite the attractive valuation of Kilroy Realty (KRC, Financial) according to the GF Value, the company's low Altman Z-score and decreasing EBIT to Total Assets ratio suggest potential financial distress. These indicators point towards the possibility of Kilroy Realty being a value trap. Therefore, investors should exercise caution and conduct thorough due diligence before investing.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
