Alphatec Holdings (ATEC): A Smart Investment or a Value Trap? An In-Depth Exploration
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Alphatec Holdings Inc (NASDAQ:ATEC). The stock, currently priced at 10.6, recorded a loss of 5.82% in a day and a 3-month decrease of 39.01%. The stock's fair valuation is $17.83, 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.
We believe the GF Value Line is the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Unveiling the Risks
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 Alphatec Holdings should not be ignored. These risks are primarily reflected through its low Altman Z-score of -0.75, and the company's revenues and earnings have been on a downward trend over the past five years. This raises a crucial question: Is Alphatec Holdings a hidden gem or a value trap? These indicators suggest that Alphatec Holdings, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding 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 Snapshot
Alphatec Holdings Inc is a medical technology company focused on the design, development, and advancement of products for the surgical treatment of spinal disorders associated with disease and degeneration, congenital deformities, and trauma. The company's spine approach technologies include Posterior Cervical Fusion, Anterior Cervical Discectomy and Fusion, Lateral Interbody Fusion, and Posterior Lumbar Interbody Fusion among others. Despite its promising offerings, the company's financial health may be weak, as suggested by its low Altman Z-Score and declining revenues and earnings.
Alphatec Holdings's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Alphatec Holdings's Altman Z-score reveals Alphatec Holdings'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 Alphatec Holdings's historical data, 2021: -1.59; 2022: -1.69; 2023: -1.64, we observe a recent decline following an initial increase in this ratio. This downward movement indicates Alphatec Holdings's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts 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 Alphatec Holdings's EBIT to Total Assets ratio from historical data (2021: -0.21; 2022: -0.31; 2023: -0.25) indicates a recent dip following an initial rise. This reduction suggests that Alphatec Holdings 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 Alphatec Holdings is its asset turnover. The data: 2021: 0.67; 2022: 0.55; 2023: 0.77 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 Alphatec Holdings's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
The Bearish Signs: Declining Revenues and Earnings
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Alphatec Holdings, both the revenue per share (evident from the last five years' TTM data: 2019: 2.25; 2020: 2; 2021: 2.34; 2022: 2.90; 2023: 3.84; ) and the 5-year revenue growth rate (-11.2%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Alphatec Holdings's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.
The Red Flag: Sluggish Earnings Growth
The company's earnings picture does not look much brighter. The 3-year EPS without NRI growth rate (-10.5%) is sluggish, and the future 3 to 5-year EPS growth estimate (0%) does not show a promising uptick. These indicators could suggest the company is struggling to translate sales into profits effectively, a critical element of a successful business model.
Despite its low price-to-fair-value ratio, Alphatec Holdings's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Alphatec Holdings's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.
Conclusion
Given the above analysis, Alphatec Holdings appears to be a potential value trap. Despite its seemingly attractive valuation, the company's financial health and performance indicators suggest underlying challenges. Investors, therefore, need to exercise caution and thorough due diligence before making an investment decision.
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Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
This article first appeared on GuruFocus.
