Is The AES (AES) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
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 (NYSE:AES). The stock, which is currently priced at 15.46, recorded a loss of 2.95% in a day and a 3-month decrease of 22.38%. The stock's fair valuation is $27.3, as indicated by its GF Value.
Understanding 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:
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.
The AES Corp (NYSE:AES): Potential Value Trap?
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 Corp (NYSE:AES) should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.52. 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.
Understanding the 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 Overview: The AES Corp (NYSE:AES)
The 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 compared to its GF Value, which is an estimation of fair value, suggests a potential undervaluation despite the associated risks.
Exploring The AES's Low Altman 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 The AES's EBIT to Total Assets ratio from historical data (2021: 0.03; 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
Considering the aforementioned factors, The AES Corp (NYSE:AES) may be a potential value trap despite its seemingly undervalued stock price. The company's low Altman Z-Score, coupled with a descending EBIT to Total Assets ratio, suggests possible financial distress. As such, thorough due diligence is crucial before making an investment decision. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article first appeared on GuruFocus.
