Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Realtyome (O, Financial). The stock, which is currently priced at 49.68, recorded a loss of 1.72% in a day and a 3-month decrease of 15.75%. The stock's fair valuation is $74.17, as indicated by its GF Value.
Unpacking 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.
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 Realtyome should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.96, and a Beneish M-Score of -1.77 that exceeds -1.78, the threshold for potential earnings manipulation. These indicators suggest that Realtyome, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-score and Beneish M-score
The Altman 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.
The Beneish M-Score is based on eight financial variables that reflect different aspects of a company's financial performance and position. These include Days Sales Outstanding (DSO), Gross Margin (GM), Total Long-term Assets Less Property, Plant and Equipment over Total Assets (TATA), change in Revenue (∆REV), change in Depreciation and Amortization (∆DA), change in Selling, General and Admin expenses (∆SGA), change in Debt-to-Asset Ratio (∆LVG), and Net Income Less Non-Operating Income and Cash Flow from Operations over Total Assets (∆NOATA).
Company Introduction
Realty Income owns roughly 13,100 properties, most of which are freestanding, single-tenant, triple-net-leased retail properties. Its properties are located in 49 states and Puerto Rico and are leased to 250 tenants from 47 industries. Recent acquisitions have added industrial, gaming, office, manufacturing, and distribution properties, which make up roughly 17% of revenue.
Realtyome's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Realtyome's Altman Z-score reveals Realtyome's financial health may be weak, suggesting possible financial distress. The days sales outstanding (DSO) is an important financial metric that denotes the average time a company takes to collect payment after a sale is completed. Looking at the historical data from the past three years (2021: 52.90; 2022: 53.98; 2023: 56.10), there appears to be a rising trend in Realtyome's DSO.
An uptick in DSO might indicate aggressive revenue recognition practices, and in some cases, potential earnings manipulation. To explain, when DSO increases, it means the company's receivables are growing. This could be a result of sales being recorded before customers have paid, which inflates the revenue figures. In extreme cases, a company may even recognize revenue from sales that may never be collected, an action that is considered earnings manipulation. A rising DSO figure warrants scrutiny as it can signal financial distress or questionable accounting practices within the company. Therefore, investors should closely monitor such trends for early detection of any potential financial risks.
The Gross Margin index tracks the evolution of a company's gross profit as a proportion of its revenue. A downward trend could indicate issues such as overproduction or more generous credit terms, both of which are potential red flags for earnings manipulation. By examining the past three years of Realtyome's historical data (2021: 93.46; 2022: 93.63; 2023: 92.25), we find that its Gross Margin has contracted by 1.64%. Such a contraction in the gross margin can negatively impact the company's profitability as it signifies lesser income from each dollar of sales. This could put a strain on the company's capacity to manage operating costs, potentially undermining its financial stability.
The Year-Over-Year (YoY) change in Revenue calculates the percentage difference in sales between the previous year and the current year. A notable upswing in this ratio could potentially signal aggressive income recognition or sales manipulation tactics. Delving into Realtyome's revenue data over the past three years (2021: 1,723.66; 2022: 2,792.67; 2023: 3,689.52), it's apparent that there has been a significant surge in revenue in the last 12 months, with a rise of 62.02 %.
Conclusion
Given the above analysis, Realtyome (O, Financial) appears to be a potential value trap. Despite its seemingly attractive valuation, the company's low Altman Z-Score and high Beneish M-Score suggest possible financial distress or earnings manipulation. Investors should therefore exercise caution and conduct thorough due diligence before investing.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
