Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Carvana Co (CVNA, Financial). The stock, which is currently priced at $30.44, recorded a loss of 10.44% in a day and a 3-month decrease of 26.54%. The stock's fair valuation is $128.37, as indicated by its GF Value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is derived from a combination of historical trading multiples, an adjustment factor based on past performance, and future business performance estimates. The GF Value Line suggests a fair trade value for the stock, with the expectation that the stock price will generally fluctuate around this line. A price well above the GF Value Line may indicate overvaluation, whereas a significant dip below could signal undervaluation and potentially higher future returns.
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 Carvana Co should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.71, suggesting that Carvana Co, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding Financial Distress Indicators
Before delving into the details, let's understand what the Altman Z-score entails. Invented by Professor Edward I. Altman in 1968, this financial model predicts the probability of a company entering bankruptcy within two years. The Altman Z-Score combines five different financial ratios 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.
Snapshot of Carvana Co's Business Operations
Carvana Co is an e-commerce platform for buying and selling used cars. The company's revenue is primarily derived from used vehicle sales, with additional revenue from wholesale vehicle sales and other sales, including loans, commissions on vehicle service contracts (VSCs), and sales of GAP waiver coverage. Retail vehicle unit sales are the foundation of the business, driving the majority of revenue and enabling the capture of additional revenue streams associated with financing, VSCs, auto insurance, GAP waiver coverage, and trade-in vehicles.
Carvana Co's Low Altman Z-Score: A Breakdown of Key Drivers
A closer look at Carvana Co's financial health through its Altman Z-score signals possible financial distress. The company's Retained Earnings to Total Assets ratio has been declining over the years (2021: -0.08, 2022: -0.13, 2023: -0.22), indicating a reduced ability to reinvest in its business or effectively manage its debt. This trend negatively impacts Carvana Co's Z-score.
The EBIT to Total Assets ratio, reflecting operational effectiveness, shows a concerning trend for Carvana Co (2021: -0.01, 2022: -0.13, 2023: -0.06). After an initial rise, a recent dip suggests a lack of asset utilization to generate operational profits, affecting the company's overall Z-score.
Regarding operational efficiency, Carvana Co's asset turnover ratio has been decreasing (2021: 2.79, 2022: 1.81, 2023: 1.34), pointing to reduced effectiveness in using assets to generate sales. This decline in asset turnover necessitates a strategic reassessment to optimize asset usage and improve sales performance.
Conclusion: The Value Trap Dilemma
While Carvana Co's stock price might seem undervalued compared to its GF Value, the financial indicators tell a different story. A low Altman Z-score, declining retained earnings ratio, fluctuating EBIT ratio, and decreasing asset turnover collectively suggest that Carvana Co could be a value trap. Investors must exercise caution and conduct comprehensive research before considering an investment in Carvana Co. For those seeking stocks with high Altman Z-Scores, GuruFocus Premium members can utilize the Walter Schloss Screen for better investment opportunities.
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.
