Value-focused investors are constantly on the lookout for stocks that are priced below their intrinsic value. Sunrun Inc (RUN, Financial), with its current stock price of $13.39 and a recent gain of 11.68% in a single day, seems to fit this criterion on the surface. The stock has also seen a 3-month increase of 12.52%. According to the GF Value, the fair valuation of Sunrun is estimated at $26.15, suggesting a potential undervaluation.
Understanding GF Value
The GF Value is a proprietary measure reflecting the intrinsic value of a stock, based on historical trading multiples, adjustments for past returns and growth, and future performance estimates. This metric suggests that Sunrun's stock should ideally trade around this value. A significant deviation from this line might indicate that the stock is either overvalued or undervalued, potentially affecting future returns.
Despite its seemingly attractive valuation, Sunrun presents certain risks that warrant a deeper analysis. The low Piotroski F-score of 1 and an Altman Z-score of -0.15 are indicators that might classify Sunrun as a potential value trap. These scores reflect underlying financial weaknesses that could pose investment risks.
Financial Health Indicators
The Piotroski F-score is crucial in evaluating the financial stability of a company. Sunrun's low score suggests issues in several areas including profitability, liquidity, and operating efficiency. Similarly, the Altman Z-score, a predictor of bankruptcy risk, further affirms the financial distress with its score significantly below the safety threshold of 1.8.
Company Overview and Financial Performance
Sunrun is a leading player in the residential solar energy sector in the United States, focusing on the design, development, and installation of solar systems. Despite the innovative business model, the company's financial metrics tell a different story. For instance, the return on assets (ROA) has been negative in recent years, with figures like -0.89% in 2022, 0.11% in 2023, and a steep drop to -7.15% in 2024.
The company's operational cash flow also raises concerns, with a reported $-524.51 million over the trailing twelve months, compared to a net loss of $-1451.93 million. Such discrepancies between cash flow and net income can indicate poor earnings quality, which is a red flag for potential investors.
Leverage and Liquidity Concerns
Sunrun has shown an increasing debt-to-total assets ratio, climbing from 44% in 2022 to 55% in 2024. This growing reliance on debt financing increases financial risk, especially if the company faces liquidity issues. The current ratio has deteriorated from 1.81 in 2023 to 1.31 in 2024, suggesting a weakening in the company's short-term financial health.
Operational Inefficiencies
Further analysis shows a troubling increase in Sunrun's diluted average shares outstanding, which can dilute shareholder value. The gross margin has also seen a decline from 14.02% in 2022 to 7.64% in 2024, indicating cost management issues or falling prices. Additionally, the asset turnover ratio has decreased, suggesting inefficiencies in using assets to generate revenue.
Conclusion: A Closer Look at the Investment Risk
While Sunrun presents an appealing case for undervaluation based on its GF Value, the underlying financial health depicted by the Piotroski F-score and Altman Z-score paints a concerning picture. These indicators, combined with operational challenges and increasing debt, suggest that Sunrun could indeed be a value trap. Investors should proceed with caution, ensuring a comprehensive analysis beyond surface-level metrics.
GuruFocus Premium members looking to avoid such traps can utilize tools like the Piotroski F-score screener and the Walter Schloss Screen to find more financially stable investments.
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.
