Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Catalent Inc (CTLT, Financial). The stock, which is currently priced at $43.86, recorded a loss of 1.66% in a day and a 3-month increase of 20.89%. The stock's fair valuation is $99.1, as indicated by its GF Value.
Understanding the 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 three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Unraveling the Risks
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 Catalent should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.46. These indicators suggest that Catalent, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot
Catalent is a contract development and manufacturing organization, or CDMO. It operates under four segments: biologics, softgel and oral technologies, oral and specialty delivery, and clinical supply services. Catalent derives its revenues primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Catalent has over 50 facilities across four continents.
Breaking Down Catalent's Low Altman Z-Score
A dissection of Catalent's Altman Z-score reveals Catalent's financial health may be weak, suggesting possible financial distress.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Catalent's EBIT to Total Assets ratio from historical data (2021: 0.09; 2022: 0.07; 2023: 0.02) indicates a descending trend. This reduction suggests that Catalent 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.
When it comes to operational efficiency, a vital indicator for Catalent is its asset turnover. The data: 2021: 0.47; 2022: 0.48; 2023: 0.42 from the past three years suggests a decreasing trend in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in Catalent's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
While Catalent's stock appears undervalued, the company's low Altman Z-Score and declining operational efficiency indicators suggest that it could be a potential value trap. It is crucial for investors to consider these risk factors and conduct thorough due diligence before making an investment decision.
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