Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Carvana Co (CVNA, Financial). The stock, which is currently priced at 36.05, recorded a loss of 4.19% in a day and a 3-month increase of 45.53%. The stock's fair valuation is $128.96, as indicated by its GF Value.
Understanding 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.
- 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.
Identifying Potential Risks in Carvana Co
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 Carvana Co should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.91. These indicators suggest that Carvana Co, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding 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: Carvana Co
Carvana Co is an e-commerce platform for buying and selling used cars. The company derives revenue from used vehicle sales, wholesale vehicle sales and other sales and revenues. The other sales and revenues include sales of loans originated and sold in securitization transactions or to financing partners, commissions received on VSCs and sales of GAP waiver coverage. The foundation of the business is retail vehicle unit sales. This drives the majority of the revenue and allows the company to capture additional revenue streams associated with financing, VSCs, auto insurance and GAP waiver coverage, as well as trade-in vehicles.
Breaking Down Carvana Co's Low Altman Z-Score
A dissection of Carvana Co's Altman Z-score reveals Carvana 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 Carvana Co's historical data, 2021: -0.08; 2022: -0.09; 2023: -0.29, we observe a declining trend in this ratio. This downward movement indicates Carvana 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 Carvana Co's EBIT to Total Assets ratio from historical data (2021: -0.01; 2022: -0.09; 2023: -0.22) indicates a descending trend. This reduction suggests that Carvana 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.
When it comes to operational efficiency, a vital indicator for Carvana Co is its asset turnover. The data: 2021: 2.69; 2022: 2.09; 2023: 1.30 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 Carvana Co's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion: Carvana Co as a Potential Value Trap
Despite its seemingly attractive valuation, Carvana Co (CVNA, Financial) presents several risk factors that potential investors should consider. The company's low Altman Z-Score, decreasing retained earnings to total assets ratio, and falling EBIT to total assets ratio all suggest possible financial distress. Furthermore, the declining trend in the asset turnover ratio implies potential operational inefficiencies. These indicators collectively suggest that Carvana Co, despite its apparent undervaluation, might be a potential value trap, emphasizing the importance of thorough due diligence in investment decision-making.
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