Value-focused investors are always on the lookout for stocks that seem undervalued compared to their intrinsic worth. Ceridian HCM Holding Inc (CDAY, Financial) is one such stock that has caught the eye of many, with its current price at $68, reflecting a recent uptick of 1.24% in a day, yet experiencing a 3-month decline of 8.49%. The stock's fair valuation, according to the GF Value, is pegged at $112.21.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock, as calculated by GuruFocus. It is based on historical trading multiples such as PE, PS, PB Ratios, and Price-to-Free-Cash-Flow, an adjustment factor derived from the company's past returns and growth, and future business performance estimates. This measure suggests that Ceridian HCM Holding Inc (CDAY, Financial) should trade around the GF Value Line, and deviations from this line can indicate overvaluation or undervaluation.
However, a prudent investor should look beyond surface-level metrics. Despite its appealing GF Value, Ceridian HCM Holding presents certain risk factors that warrant a closer look. These risks are encapsulated by its low Altman Z-score of 1.15, which raises red flags about the company's financial stability and suggests that Ceridian HCM Holding, despite its apparent undervaluation, might be a potential value trap. This complexity underscores the need for thorough due diligence before making any investment decisions.
Decoding the Altman Z-Score
Before we proceed, let's clarify what the Altman Z-score is. Developed by Professor Edward I. Altman in 1968, the Z-Score is a financial model that assesses the probability of bankruptcy for a company within two years. It combines five different financial ratios into a final score. A score below 1.8 indicates a high risk of financial distress, while a score above 3 suggests low risk. Ceridian HCM Holding's low Z-score is a cautionary indicator for potential investors.
Snapshot of Ceridian HCM Holding
Ceridian HCM Holding provides comprehensive payroll and human capital management solutions, primarily through its flagship cloud HCM platform, Dayforce. The company's transition to cloud-based services after its 2012 acquisition of Dayforce marked a strategic pivot from its legacy on-premises Bureau business. Approximately 80% of its revenue is generated from Dayforce, aimed at enterprise clients, with the remainder split between its Powerpay platform for small businesses in Canada and legacy Bureau products. This income structure is crucial for understanding the company's financial performance and future prospects.
Breaking Down Ceridian HCM Holding's Low Altman Z-Score
The low Altman Z-score of Ceridian HCM Holding is a pivotal factor in assessing its financial health. This score may imply that the company is experiencing financial challenges, which could lead to potential distress or bankruptcy within the near future. Such a financial position is worrisome for investors looking for stable and secure investments, and it is a critical component in evaluating whether Ceridian HCM Holding is a value trap.
Conclusion
In conclusion, while Ceridian HCM Holding may appear undervalued based on its GF Value, the company's low Altman Z-score suggests that it could be a value trap. Investors should exercise caution and conduct extensive research before considering an investment in CDAY. For those seeking to identify stocks with higher financial stability, GuruFocus Premium members can utilize the Walter Schloss Screen to find companies with high Altman Z-Scores. Is Ceridian HCM Holding a diamond in the rough, or is it a mirage that could evaporate upon closer inspection? That is the question value investors must ponder.
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.
