Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Wolfspeed Inc (WOLF, Financial). The stock, which is currently priced at $36.35, recorded a gain of 11.4% in a day and a 3-month decrease of 33.22%. The stock's fair valuation is $123.53, as indicated by its GF Value.
Understanding GF Value
The GF Value is a unique metric that represents the intrinsic value of a stock based on historical trading multiples, adjustments for past performance, and future business projections. When a stock trades below this line, it suggests a higher future return, but when it's above, the stock is considered overvalued, with a poorer return outlook.
However, an attractive GF Value is not the sole factor to consider when making an investment decision. A deeper dive into Wolfspeed's financials reveals potential risks. The company's low Piotroski F-score of 2, Altman Z-score of 0.45, and other financial indicators suggest that Wolfspeed might be a potential value trap, warranting thorough due diligence from investors.
Financial Health Indicators: Piotroski F-score and Altman Z-score
The Piotroski F-score assesses a company's financial health across nine criteria, with higher scores indicating healthier financials. Wolfspeed's low score signals potential red flags. Similarly, the Altman Z-score predicts bankruptcy risk, with scores below 1.8 indicating high financial distress probability. Wolfspeed's Z-score is well below this threshold.
Snapshot of Wolfspeed's Business Operations
Wolfspeed Inc specializes in the manufacturing of semiconductors for power and RF applications. Its products serve a variety of sectors, including transportation and wireless systems. The company's market cap stands at $4.60 billion, with sales of $878 million. Despite its significant market presence, the discrepancy between its stock price and the GF Value raises questions about its true worth.
Analysis of Wolfspeed's Profitability
Wolfspeed's profitability is concerning, with a negative return on assets (ROA) trend over the past three years: 2021: -12.45%, 2022: -4.36%, 2023: -12.25%. This decline in ROA is a red flag in the Piotroski F-Score methodology, suggesting financial instability.
Further, the company's cash flow from operations over the trailing twelve months (TTM) is significantly lower at $-277.3 million compared to a net income of $-699.4 million. Such discrepancies between operating cash flow and net income can indicate poor earnings quality and potential sustainability issues.
Leverage, Liquidity, and Source of Funds: A Worrying Trend
An increasing debt-to-total assets ratio is another concern for Wolfspeed, with figures rising from 2021: 26% to 2023: 71%. This indicates higher financial risk due to increased reliance on debt, a negative sign per the Piotroski F-Score.
Operating Efficiency: A Darker Picture
The company's diluted average shares outstanding have increased over the past three years: 2021: 115.92 million, 2022: 124.04 million, 2023: 125.11 million. This dilution can lead to reduced Earnings Per Share (EPS) if the company's earnings growth does not keep pace.
A declining gross margin percentage from 2021: 31.50% to 2023: 25.55%, and a decreasing asset turnover ratio from 2021: 0.17 to 2023: 0.15, further indicate problems in operational efficiency and profitability.
Conclusion: The Value Trap Predicament
Despite its seemingly undervalued price, Wolfspeed's financial indicators, including a low Piotroski F-score and Altman Z-score, suggest that the company could be a value trap. The combination of profitability concerns, rising debt, share dilution, and operational inefficiencies paints a cautionary picture for investors. It is essential to weigh these risks against the potential rewards before making an investment decision.
For those seeking to identify stocks with robust financial health, GuruFocus Premium members can utilize the Piotroski F-score screener and Walter Schloss Screen for high Altman Z-Score stocks.
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.
