Is The AES Corp (AES) a Value Trap? Unveiling Hidden Risks
Value-focused investors constantly seek stocks priced below their intrinsic value. An intriguing case is The AES Corp (NYSE:AES), currently priced at $18.87, with a day's loss of 3.06% and a 3-month decrease of 13.27%. The stock's fair valuation, as indicated by its GF Value, is $27.51.
Understanding GF Value
The GF Value represents a stock's current intrinsic value, derived from our unique method. This value is calculated based on historical multiples, GuruFocus adjustment factor, and future estimates of business performance. If the stock price significantly deviates from the GF Value Line, it indicates a potential overvaluation or undervaluation.
Despite its seemingly attractive valuation, The AES (NYSE:AES) carries certain risks, reflected in its low Altman Z-score of 0.56. This suggests that The AES, despite its apparent undervaluation, might be a potential value trap, underlining the importance of thorough due diligence in investment decision-making.
Deciphering the Altman Z-Score
The Altman Z-score, developed by NYU Professor Edward I. Altman, predicts a company's bankruptcy probability within two years. It 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 Snapshot
The AES Corp is a global power company with over 32 gigawatts of generation, including renewable energy (46%), gas (32%), coal (20%), and oil (2%). It has majority ownership and operates six electric utilities distributing power to 2.6 million customers.
The AES's Low Altman Z-Score: A Breakdown of Key Drivers
The AES's low Altman Z-score suggests potential financial distress. The EBIT to Total Assets ratio, a key measure of a company's operational effectiveness, indicates that The AES might not be utilizing its assets to their full potential to generate operational profits. This could be negatively affecting the company's overall Z-score.
Conclusion: The AES as a Value Trap
Despite its attractive valuation, The AES Corp appears to be a potential value trap. Its low Altman Z-score and declining EBIT to Total Assets ratio suggest potential financial distress. Investors should exercise due diligence and consider these risk factors 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.
