Value-focused investors are constantly seeking stocks that are priced below their intrinsic value. One stock that has recently caught the attention of many is Avangrid Inc (AGR, Financial). Despite its current price of $28.33, which has seen a daily loss of 6.12% and a 3-month decrease of 23.56%, the GF Value of Avangrid (AGR) stands at $50.08. This discrepancy between the market price and the intrinsic value suggests that Avangrid could be undervalued.
Understanding GF Value
The GF Value is a unique calculation that represents the current intrinsic value of a stock. It's derived from three key factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow), a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line provides a visual representation of a stock's fair value, around which the stock price is likely to fluctuate. If a stock price is significantly above the GF Value Line, it is considered 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.
Deeper Analysis Required
While Avangrid's seemingly attractive valuation may be enticing, it is crucial to consider the potential risks associated with the company. These risks are primarily reflected through its low Altman Z-score of 0.6. This score suggests that Avangrid, despite its apparent undervaluation, might be a potential value trap, underlining the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
The Altman Z-score is a financial model developed in 1968 by New York University Professor Edward I. Altman. It predicts the probability of a company entering bankruptcy within a two-year timeframe by combining 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
Avangrid operates in two business units, Networks and Renewables. Networks operates eight regulated electric and natural gas utilities across New York, Maine, Connecticut, and Massachusetts, serving over 3 million customers. Renewables has historically focused on developing onshore wind projects but is looking to make developments in solar and offshore wind over the next five years. It operates more than 8.6 gigawatts of renewable energy across the U.S. Spanish utility Iberdrola spun off Avangrid's predecessor, Iberdrola USA, in 2015. Iberdrola owns 81.5% of Avangrid.
Avangrid's Low Altman Z-Score: A Breakdown of Key Drivers
A closer look at Avangrid's Altman Z-score reveals that Avangrid's financial health may be weak, suggesting possible financial distress.
Conclusion
In light of the above analysis, Avangrid (AGR, Financial) appears to be a potential value trap. Despite its seemingly attractive valuation, the company's low Altman Z-Score indicates a high likelihood of financial distress. Therefore, investors should exercise caution and conduct thorough due diligence before making any investment decisions.
GuruFocus Premium members can find stocks with high Altman Z-Score using the Walter Schloss Screen.
