Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Staar Surgical Co (STAA, Financial). The stock, which is currently priced at $31.8, recorded a loss of 6.19% in a single day and a 3-month decrease of 23.66%. The stock's fair valuation is $100.29, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from GuruFocus' exclusive method. The GF Value Line on our summary page provides an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples such as the PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, adjusted for the company's past returns and growth, and considering future estimates of business performance.
Typically, if the stock price is significantly above the GF Value Line, it is considered overvalued and may yield poor future returns. Conversely, if it is well below the GF Value Line, the potential for higher future returns exists. However, this is not a guarantee and further analysis is crucial before making an investment decision.
Despite Staar Surgical Co's seemingly attractive valuation, certain risk factors should not be ignored. These risks are reflected through its low Piotroski F-score of 2, and a Beneish M-Score of -1.32, which exceeds the threshold of -1.6 for potential earnings manipulation. These indicators suggest that Staar Surgical Co, despite its apparent undervaluation, might be a potential value trap, underlining the importance of thorough due diligence.
Financial Health Indicators: Piotroski F-score and Beneish M-score
The Piotroski F-score is a tool used to assess the financial health of a company. It is based on nine criteria within three categories: profitability, leverage/liquidity/source of funds, and operating efficiency. A score ranges from 0 to 9, with higher scores indicating healthier financials. Staar Surgical Co's low score indicates potential red flags for investors.
The Beneish M-Score is based on eight financial variables that reflect different aspects of a company's financial performance and position. These include Days Sales Outstanding (DSO), Gross Margin (GM), and other metrics that can give insight into the company's financial practices and potential for earnings manipulation.
Staar Surgical Co's Business Operations
Staar Surgical Co is a manufacturer of lenses for eye surgeries, including those that treat cataracts. The company designs, develops, manufactures, and sells implantable lenses and delivery systems. It primarily generates sales from the ophthalmic surgical product segment. Understanding the company's operations is essential when comparing the stock price to the GF Value, as it provides context for evaluating the company's potential value.
Profitability Analysis: Red Flags in Cash Flow and Net Income
The discrepancy between Staar Surgical Co's cash flow from operations over the trailing twelve months (TTM) at $-14.41 million and a significantly higher net income of $19.44 million is concerning. The Piotroski F-score considers this mismatch a potential red flag, as operating cash flow is a more reliable measure of cash-generating ability than net income, which can be influenced by accounting treatments.
Leverage, Liquidity, and Source of Funds: A Worrying Trend
Staar Surgical Co's increasing debt-to-total assets ratio over the past three years, with percentages of 0.07 in 2021, 0.08 in 2022, and 0.08 in 2023, suggests the company is financing its assets through more debt, which escalates financial risk. The Piotroski F-Score views this as a negative indicator, further cautioning investors about Staar Surgical Co.
Operating Efficiency: Assessing Share Dilution and Asset Utilization
A rise in Staar Surgical Co's Diluted Average Shares Outstanding over the past three years indicates share issuance, which can dilute existing share value and potentially impact investment returns. Furthermore, the company's declining asset turnover suggests a drop in efficiency, possibly due to underutilization of assets or declining market demand, which could impact sales and profitability.
Assessing Gross Margin and Asset Quality
A contraction of 5.72% in Staar Surgical Co's Gross Margin over the past three years could signal issues affecting profitability and the ability to manage operating costs. The increase in the company's asset quality ratio might also indicate underlying issues, such as capitalizing normal operating expenses or goodwill impairment, potentially misrepresenting the company's financial position and raising investor concerns.
Earnings Quality: The TATA Ratio's Implications
Staar Surgical Co's positive TATA ratio of 0.071 suggests that its earnings are composed more of accruals rather than cash flow, which could indicate aggressive income recognition. Investors and analysts should examine the components of the TATA ratio closely, especially when the value is positive, to understand the underlying drivers and assess the need for more detailed scrutiny of the company's financial practices.
Conclusion: Navigating the Value Trap
While Staar Surgical Co's stock price might seem undervalued compared to its GF Value, the company's financial health indicators, such as the Piotroski F-score and Beneish M-score, paint a different picture. These indicators, along with concerns about cash flow, debt levels, share dilution, and asset utilization, suggest that Staar Surgical Co could be a value trap. Investors must exercise caution and conduct thorough research before considering an investment in Staar Surgical Co.
GuruFocus Premium members can find stocks with high Piotroski F-scores using the Piotroski F-score screener. To discover high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
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.
