Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is The AES Corp (AES, Financial). The stock, which is currently priced at 16.79, recorded a gain of 8.32% in a day and a 3-month decrease of 17.78%. The stock's fair valuation is $27.26, 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:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. 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.
The Risks Associated with The AES (AES, Financial)
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 The AES should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.51. These indicators suggest that The AES, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding Piotroski F-Score and Altman Z-Score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/ source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. The AES's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
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.
Introducing The AES Corp (AES, Financial)
AES is a global power company. Its current generation portfolio as of year-end 2022 consists of over 32 gigawatts of generation including renewable energy (46%), gas (32%), coal (20%), and oil (2%). AES has majority ownership and operates six electric utilities distributing power to 2.6 million customers. The AES's stock price and the GF Value, which is an estimation of fair value, provide an initial comparison for potential investors.
The AES's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of The AES's Altman Z-score reveals The AES'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 The AES's EBIT to Total Assets ratio from historical data (2021: 0.06; 2022: 0.01; 2023: 0.03) indicates a descending trend. This reduction suggests that The AES 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 AES's seemingly attractive valuation, the company's low Altman Z-Score and Piotroski F-Score suggest potential financial distress, making it a possible value trap. Therefore, investors should exercise caution and conduct thorough due diligence before making an investment decision.
GuruFocus Premium members can find stocks with high Piotroski F-score using the following Screener: Piotroski F-score screener .GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
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.
