Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Twist Bioscience Corp (TWST, Financial). The stock, which is currently priced at $31.25, recorded a gain of 10.48% in a day and a 3-month increase of 35.57%. The stock's fair valuation is $59.78, 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 historical multiples such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, adjusted for the company's past returns and growth, and future estimates of business performance. Ideally, the stock price should fluctuate around the GF Value Line, with significant deviations indicating overvaluation or undervaluation.
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 Twist Bioscience should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2. Such indicators suggest that Twist Bioscience, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
The Significance of Piotroski F-Score
The Piotroski F-score is a tool used to assess the strength of a company's financial health. A score of 2 out of 9 indicates potential red flags for investors, as it falls in the lower end of the spectrum, signifying weak financials. The score is based on nine criteria within three categories: profitability, leverage/liquidity/source of funds, and operating efficiency.
Twist Bioscience Corp: A Snapshot
Twist Bioscience Corp is a synthetic biology company that develops a disruptive DNA synthesis platform to industrialize the engineering of biology. With a majority of its revenue derived from the United States, Twist Bioscience's DNA synthesis platform utilizes a proprietary semiconductor-based process, enabling the production of high-quality synthetic DNA faster and more affordably. The company's market cap stands at $1.80 billion, with sales of $245.10 million, yet it faces an operating margin of -84.41 and a concerning Return on Invested Capital (ROIC) of -48.81, against a Weighted Average Cost of Capital (WACC) of 15.78.
Profitability Concerns for Twist Bioscience
Twist Bioscience's profitability is a major concern, as evidenced by its negative Return on Assets (ROA), indicating the company's struggle to generate profit from its assets. The financials reveal a trailing twelve months (TTM) cash flow from operations at $-142.47 million, with net income at a higher deficit of $-204.62 million. The discrepancy between operating cash flow and net income, which is a critical component of the Piotroski F-score, signals poor earnings quality and potential sustainability issues.
Leverage, Liquidity, and Source of Funds
Twist Bioscience's increasing debt-to-total assets ratio over the past three years, with figures rising from 0.09 in 2021 to 0.12 in 2023, highlights escalating financial risk. The Piotroski F-score views this as a negative indicator. Furthermore, a decreasing current ratio over the same period, from 8.67 to 5.79, suggests deteriorating liquidity and capability to manage short-term financial obligations.
Operating Efficiency and Shareholder Value
The increase in Twist Bioscience's Diluted Average Shares Outstanding over the past three years, from 49.36 in 2021 to 57.28 in 2023, suggests share dilution and potential value erosion for existing shareholders. Additionally, a declining asset turnover ratio, from 0.21 to 0.28, indicates reduced efficiency in using assets to generate sales. These trends necessitate a reassessment of operational strategies to improve asset utilization and sales volume.
Financial Health Indicators
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 Twist Bioscience, its current score suggests potential troubles. The concerning signals include poor profitability, increasing debt, declining liquidity, share dilution, and decreased operational efficiency. These factors cumulatively point towards the possibility of Twist Bioscience being a value trap.
Conclusion: Navigating the Investment Maze
Despite the allure of an undervalued stock price, Twist Bioscience presents several financial red flags that should caution value investors. The combination of its low Piotroski F-score, negative profitability metrics, and declining operational efficiency underline the risks associated with investing in the company. These warning signs suggest that Twist Bioscience might indeed be a value trap, emphasizing the need for investors to conduct thorough research and seek stocks with stronger financial health indicators. For GuruFocus Premium members, the Piotroski F-score screener is an invaluable tool to identify more promising 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.
