Value-focused investors are always on the lookout for stocks that appear undervalued compared to their intrinsic value. Sunrun Inc (RUN, Financial), currently priced at $13.39 with a recent daily gain of 11.68% and a three-month increase of 12.27%, might look like an attractive investment. According to the GF Value, the fair valuation of Sunrun stands at $26.15, suggesting a potential undervaluation.
Understanding GF Value
The GF Value is a unique valuation metric that determines the intrinsic value of a stock based on historical trading multiples, adjustments for past performance, and future performance estimates. If a stock's price significantly deviates from the GF Value, it could indicate mispricing. For Sunrun, the current market price is well below the GF Value, which typically suggests a good investment opportunity. However, the reality might be more complex.
Despite the seemingly attractive valuation, Sunrun presents several financial risk indicators that should not be overlooked. The company has a Piotroski F-score of 1 and an Altman Z-score of -0.16, both of which signal potential financial distress or poor financial health.
Financial Health Indicators
The Piotroski F-score is a tool used to assess the financial strength of a company. Sunrun's low score suggests issues in several areas such as profitability, funding, and operational efficiency. Specifically, Sunrun has shown a troubling trend in its return on assets (ROA), with recent figures showing a significant drop to -7.15% in 2024 from 0.11% in 2023.
Furthermore, the company's operational cash flow has been negative at $-524.51 million over the trailing twelve months, which is concerning when compared to a net income of $-1451.93 million. This discrepancy highlights potential issues in earnings quality and operational efficiency.
Leverage and Liquidity Concerns
Sunrun has been increasing its debt relative to its assets, with the debt-to-total assets ratio rising from 0.44 in 2022 to 0.55 in 2024. This increase in leverage, coupled with a declining current ratio from 1.81 in 2023 to 1.31 in 2024, signals worsening liquidity and potential difficulties in meeting short-term obligations.
Operational Inefficiencies
The increase in Sunrun's diluted average shares outstanding from 208.68 million in 2022 to 219.88 million in 2024 suggests dilution of shareholder value. Additionally, a declining gross margin from 14.02% in 2022 to 7.64% in 2024 indicates rising costs or falling prices, which are detrimental to profitability. The asset turnover ratio has also decreased, pointing to reduced efficiency in using assets to generate sales.
While the low GF Value might attract investors, the underlying financial metrics and trends suggest that Sunrun could be a value trap. The company's financial instability, highlighted by poor scores on key financial health indicators, suggests that the risks might outweigh the potential rewards.
Conclusion: Proceed with Caution
Investing in Sunrun might seem tempting due to its apparent undervaluation according to GF Value. However, the array of financial health concerns, from poor profitability and operational inefficiency to high leverage and liquidity risks, suggests that it might be a value trap. Investors should conduct thorough due diligence and consider these risk factors before deciding to invest in Sunrun. For those looking for more secure investment opportunities, exploring stocks with higher Piotroski F-scores might be advisable.
GuruFocus Premium members can find stocks with high Piotroski F-scores using our Piotroski F-score screener and stocks with high Altman Z-Scores using our 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.
