Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is ICU Medical Inc (ICUI, Financial). The stock, which is currently priced at 84.34, recorded a loss of 17.31% in a day and a 3-month decrease of 50.8%. The stock's fair valuation is $314.08, 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:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. 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.
Investigating Potential 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 ICU Medical should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.61, and These indicators suggest that ICU Medical, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding 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 Snapshot: ICU Medical Inc (ICUI, Financial)
ICU Medical is a California-based, pure-play infusion therapy company that provides consumables, systems, and services for virtually every component of the IV continuum of care. It holds top-tier positions in its original reporting segments: infusion consumables (25% of 2022 revenue), IV solutions (16%), infusion systems (15%), and critical care (2%) as well as its new Smiths segments: Smiths infusion systems (15%), vascular access (14%), and vital care (12%). The combined entity remains primarily U.S. focused, generating over 64% of its sales domestically.
ICU Medical's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of ICU Medical's Altman Z-score reveals ICU Medical's financial health may be weak, suggesting possible financial distress:
The first factor we need to consider is a measure of short-term liquidity. This is calculated as the working capital divided by total assets. When we evaluate the data provided: 2021: 0.01; 2022: -0.02; 2023: -0.02, it's clear that ICU Medical has experienced a declining trend in its Working Capital to Total Assets ratio over the past few years. This decline suggests potential liquidity issues that the company may be facing. The ratio is strikingly low, which unfavorably influences the overall Z-Score.
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating ICU Medical's historical data, 2021: 0.49; 2022: 0.19; 2023: 0.19, we observe a declining trend in this ratio. This downward movement indicates ICU Medical's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts 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 ICU Medical's EBIT to Total Assets ratio from historical data (2021: 0.09; 2022: 0.00; 2023: 0.01) indicates a descending trend. This reduction suggests that ICU Medical 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.
When it comes to operational efficiency, a vital indicator for ICU Medical is its asset turnover. The data: 2021: 0.73; 2022: 0.58; 2023: 0.50 from the past three years suggests a decreasing trend in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in ICU Medical's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
ICU Medical's low Altman Z-Score and declining operational efficiency suggest that it might be a potential value trap. While the stock appears undervalued, the financial health of the company raises concerns. As such, investors should 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 .
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.
