Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Sunrun Inc (RUN, Financial). The stock, which is currently priced at $10.98, recorded a gain of 18.96% in a day and a 3-month decrease of 34.53%. The stock's fair valuation is $35.17, as indicated by its 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 such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow; 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. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
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 Sunrun should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of -0.14, and significant revenue and earnings decline. These indicators suggest that Sunrun, 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 Piotroski F-score and Altman Z-score
The Piotroski F-score is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. Sunrun's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
The Altman Z-score predicts the probability of a company entering bankruptcy within a two-year time frame. The 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. Sunrun's Altman Z-score of -0.14 is particularly concerning, as it suggests the company could be at risk of financial instability.
Company Introduction
Sunrun is engaged in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. The company acquires customers directly and through relationships with various solar and strategic partners. The solar systems are constructed either by Sunrun or by Sunrun's partners and are owned by the company. Sunrun's customers typically enter into 20- to 25-year agreements to utilize its solar energy system. The company also sells solar energy systems and products, such as panels and racking, and solar leads generated to customers.
When comparing the stock price to the GF Value, which estimates fair value, it becomes clear that Sunrun's stock is trading significantly below what is considered its intrinsic value. However, the reasons behind this discrepancy are crucial to understand before making any investment decisions.
Analysis of Sunrun's Profitability
One significant component of the F-Score is a positive return on assets (ROA). Sunrun's ROA reveals a worrying trend of negative returns, indicating the company's inability to generate profit from its assets. The decline in ROA over the past three years is concerning, with figures showing 2021: -1.57%, 2022: 0.42%, 2023: -6.07%. This ongoing decline highlights another potential risk associated with investing in Sunrun.
The company's cash flow from operations over the trailing twelve months (TTM) is at $-1009.41 million, whereas the net income in the same period is at $-1191.35 million. The discrepancy between operating cash flow and net income is seen as a potential red flag by the Piotroski F-score, as operating cash flow is a more direct measure of cash-generating ability than net income, which is susceptible to accounting treatments and non-cash items.
Leverage, Liquidity, and Source of Funds: A Worrying Trend
Sunrun demonstrates an alarming rise in its debt-to-total assets ratio over the past three years, with data showing 2021: 40%, 2022: 45%, 2023: 53%. A higher debt ratio suggests that Sunrun is increasingly financing its assets through debt, escalating its financial risk. The Piotroski F-Score views this as a negative indicator, further cautioning investors about Sunrun.
Operating Efficiency: A Darker Picture
Sunrun has seen an increase in its Diluted Average Shares Outstanding over the past three years, with figures showing 2021: 213.02 million, 2022: 220.85 million, 2023: 217.34 million. This trend of issuing more shares can lead to the dilution of existing shares' value, potentially impacting investment returns. Additionally, the decrease in gross margin percentage over the past three years, with data showing 2021: 16.81%, 2022: 13.24%, 2023: 7.80%, suggests that Sunrun is facing an escalation in the cost of goods sold or dwindling prices. The declining trend in asset turnover, with figures showing 2021: 0.11%, 2022: 0.12%, 2023: 0.12%, indicates a drop in efficiency and could point to underutilization of assets or a decline in market demand.
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for Sunrun, its current score suggests potential troubles, such as weak profitability, increasing debt levels, and declining operational efficiency, which are concerning signals for investors.
Sunrun's Low Altman Z-Score: A Breakdown of Key Drivers
A closer examination of Sunrun's Altman Z-score confirms the company's financial health may be weaker than desired, suggesting possible financial distress. This low score is a critical red flag, indicating that the company could be facing serious financial challenges in the near future.
Conclusion
Despite the allure of Sunrun's low stock price relative to its GF Value, the company's financial indicators, such as the Piotroski F-score and Altman Z-score, point to a potential value trap. The significant revenue and earnings decline, coupled with the financial health risks identified, suggest that investors should proceed with caution. It is imperative to conduct thorough research and consider these financial health indicators before making any investment decisions.
GuruFocus Premium members can find stocks with high Piotroski F-scores using the following Screener: Piotroski F-score screener. Additionally, those seeking stocks with high Altman Z-Scores can utilize the Walter Schloss Screen: 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.
