Is Algonquin Power & Utilities (AQN) Too Good to Be True? A Comprehensive Analysis of a ...
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Algonquin Power & Utilities Corp (NYSE:AQN). The stock, currently priced at 5.65, recorded a loss of 4.56% in a day and a 3-month decrease of 30.33%. The stock's fair valuation is $16.59, 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: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
Investing in Algonquin Power & Utilities: A Deeper Look
Despite its seemingly attractive valuation, certain risk factors associated with Algonquin Power & Utilities should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.27. This indicator suggests that Algonquin Power & Utilities, despite its apparent undervaluation, might be a potential value trap. Thorough due diligence is essential in investment decision-making.
Decoding the Altman Z-Score
The Altman Z-score, invented by New York University Professor Edward I. Altman in 1968, 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.
Algonquin Power & Utilities: An Overview
Algonquin Power & Utilities Corp, a parent company of Liberty, is a diversified international generation, transmission, and distribution utility with over $16 billion of total assets. AQN is committed to providing safe, secure, reliable, cost-effective, and sustainable energy and water solutions through its portfolio of electric generation, transmission, and distribution utility investments to over one million customer connections, largely in the United States and Canada. AQN provides renewable energy through its portfolio of long-term contracted wind, solar, and hydroelectric generating facilities.
Breaking Down Algonquin Power & Utilities's Low Altman Z-Score
A dissection of Algonquin Power & Utilities's Altman Z-score reveals that AQN's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Algonquin Power & Utilities's historical data, 2021: -0.01; 2022: -0.03; 2023: -0.06, we observe a declining trend in this ratio. This downward movement indicates AQN's diminishing ability to reinvest in its business or effectively manage its debt, exerting a negative impact on its 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 AQN's EBIT to Total Assets ratio from historical data (2021: 0.05; 2022: 0.02; 2023: 0.00) indicates a descending trend. This reduction suggests that AQN 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.
When it comes to operational efficiency, a vital indicator for AQN is its asset turnover. The data: 2021: 0.15; 2022: 0.14; 2023: 0.16 from the past three years suggests a recent decline following an initial increase in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in AQN's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion: Is Algonquin Power & Utilities a Value Trap?
Despite its seemingly undervalued status according to the GF Value, the financial risks associated with Algonquin Power & Utilities make it a potential value trap for investors. The company's low Altman Z-Score and declining financial ratios suggest potential financial distress and decreased operational efficiency. Therefore, investors should exercise caution and conduct thorough due diligence before investing in AQN.
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This article first appeared on GuruFocus.
