For value-focused investors, finding stocks priced below their intrinsic value is always a rewarding pursuit. One such stock that has been catching attention is The AES Corp (AES, Financial). Currently priced at $18.4, the stock recorded a loss of 3.26% in a day and a 3-month decrease of 15.8%. The fair value of the stock, as indicated by its GF Value, is $27.5.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from GuruFocus's exclusive method. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. This value is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus's adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
The AES: A Closer Look
As attractive as its valuation may seem, certain risk factors associated with The AES cannot be overlooked. These risks are reflected through its low Altman Z-score of 0.56, suggesting that The AES, despite its apparent undervaluation, might be a potential value trap. This complexity underscores the importance of thorough due diligence before making an investment decision.
Deciphering the Altman Z-Score
The Altman Z-score is a financial model invented by New York University Professor Edward I. Altman in 1968. It predicts the probability of a company entering bankruptcy within a two-year time frame by combining five different financial ratios. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Profile: The AES Corp (AES, Financial)
The AES is a global power company with a diverse generation portfolio that includes renewable energy (46%), gas (32%), coal (20%), and oil (2%). As of year-end 2022, the company has over 32 gigawatts of generation and operates six electric utilities distributing power to 2.6 million customers.
Breaking Down The AES's Low Altman Z-Score
The EBIT to Total Assets ratio is a crucial indicator of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of The AES's EBIT to Total Assets ratio from historical data (2021: 0.03; 2022: 0.01; 2023: 0.03) indicates a descending trend. This reduction suggests that The AES might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Conclusion: The AES as a Value Trap
Despite its seemingly attractive valuation, The AES presents potential risks that investors must consider. With its low Altman Z-Score and declining EBIT to Total Assets ratio, The AES might be a potential value trap, indicating the importance of thorough due diligence before making an investment decision. GuruFocus Premium members looking for stocks with high Altman Z-Score can use the Walter Schloss Screen .
