Gen Digital Inc (GEN, Financial) experienced a daily gain of 7.95%, with an Earnings Per Share (EPS) of 2.08. However, the question remains: is this stock a potential value trap? This article aims to provide a comprehensive valuation analysis of Gen Digital, advising investors to think twice before making a decision. We encourage you to delve into the following analysis to gain a deeper understanding of the company's valuation.
Company Overview
Gen Digital Inc, a cybersecurity pure-play, offers security, identity protection, and privacy solutions to individual consumers. Its renowned brands such as Norton, Avast, and LifeLock have long upheld their positions within the consumer-focused security and identity-protection market. As of August 05, 2023, Gen Digital (GEN, Financial) traded at $20.1 per share, with a market cap of $12.9 billion. However, the GF Value, an estimation of fair value, stands at $29.48, suggesting a possible discrepancy between the stock price and its intrinsic value.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
Based on GuruFocus' valuation method, Gen Digital (GEN, Financial) appears to be a potential value trap. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. At its current price of $20.1 per share, Gen Digital has a market cap of $12.9 billion and is estimated to be a potential value trap.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must thoroughly review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can provide a good initial perspective on the company's financial strength. Gen Digital has a cash-to-debt ratio of 0.08, which ranks worse than 93.84% of companies in the Software industry. Based on this, GuruFocus ranks Gen Digital's financial strength as 3 out of 10, suggesting a poor balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Gen Digital has been profitable for 9 out of the past 10 years. Over the past twelve months, the company had a revenue of $3.6 billion and Earnings Per Share (EPS) of $2.08. Its operating margin is 38.83%, which ranks better than 97.61% of companies in the Software industry. Overall, the profitability of Gen Digital is ranked 7 out of 10, indicating fair profitability.
Growth is one of the most crucial factors in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Gen Digital's 3-year average revenue growth rate is better than 58.3% of companies in the Software industry. However, Gen Digital's 3-year average EBITDA growth rate is 4.7%, which ranks worse than 58.55% of companies in the Software industry, indicating potentially lackluster growth.
ROIC vs WACC
Another way to assess the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business, while WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, ROIC should be higher than WACC. For the past 12 months, Gen Digital's ROIC is 17.27, and its WACC is 7.58.
Identifying a Potential Value Trap
Despite signs of undervaluation, Gen Digital's high Beneish M-Score of -1.52, surpassing the -1.78 threshold, raises concerns about potential earnings manipulation. The Beneish M-Score is a mathematical model designed to identify whether a company may have manipulated its profits. To gain more insights into the Beneish M-Score and its implications, please click here.
Furthermore, the company's Altman Z-score stands at 0.81, placing it in the distress zone and signaling an increased bankruptcy risk. Ideally, an Altman Z-score above 2.99 reflects a safer financial position. To further comprehend the Z-score's role in assessing a company's financial risk, please click here.
Conclusion
Overall, Gen Digital (GEN, Financial) stock is estimated to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 58.55% of companies in the Software industry. To learn more about Gen Digital stock, you can check out its 30-Year Financials here.
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