Value-focused investors are consistently on the hunt for stocks priced below their intrinsic value. One such stock capturing attention is WestRock Co (WRK, Financial). Currently priced at $33.38, the stock recorded a daily gain of 4.71% and a 3-month increase of 9.82%. The stock's fair valuation, as indicated by its GF Value, is $48.79.
Understanding GF Value
The GF Value represents the intrinsic value of a stock derived from GuruFocus's exclusive method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. 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.
- Future estimates of the business performance.
If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Unveiling the Risks
Despite its seemingly attractive valuation, certain risk factors associated with WestRock Co should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.02. These indicators suggest that WestRock Co, despite its apparent undervaluation, might be a potential value trap. This complexity underscores 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
WestRock manufactures corrugated packaging and consumer packaging, such as folding cartons and paperboard. After the merger of RockTenn and MeadWestvaco in fall 2015, WestRock became the largest North American producer of solid bleached sulfate and the second-largest producer of containerboard, which is used in the production of shipping containers.
WestRock Co's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of WestRock Co's Altman Z-score reveals WestRock Co's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating WestRock Co's historical data, 2021: 0.05; 2022: 0.07; 2023: 0.01, we observe a declining trend in this ratio. This downward movement indicates WestRock Co's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
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 WestRock Co's EBIT to Total Assets ratio from historical data (2021: 0; 2022: 0.06; 2023: -0.03) indicates a descending trend. This reduction suggests that WestRock Co 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
Despite the seemingly attractive valuation of WestRock Co (WRK, Financial), the low Altman Z-Score and declining financial health indicators suggest that it might be a potential value trap. Therefore, investors should exercise caution and conduct thorough due diligence before making an investment decision.
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