Is Ceridian HCM Holding (CDAY) Too Good to Be True? A Comprehensive Analysis of a Potential ...
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Ceridian HCM Holding Inc (NYSE:CDAY). The stock, which is currently priced at 66.22, recorded a gain of 1.91% in a day and a 3-month increase of 3.03%. The stock's fair valuation is $117.54, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from GuruFocus's exclusive method. The GF Value Line on the 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, GuruFocus adjustment factor based on the company's past returns and growth, and 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.
Considering 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 Ceridian HCM Holding should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.24. These indicators suggest that Ceridian HCM Holding, 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
Ceridian HCM provides payroll and human capital management solutions targeting clients with 100-100,000 employees. Following the 2012 acquisition of Dayforce, Ceridian pivoted away from its legacy on-premises Bureau business to become a cloud HCM provider. As of fiscal 2022, about 80% of group revenue was derived from the flagship Dayforce platform geared toward enterprise clients. The remaining revenue is about evenly split between cloud platform Powerpay, targeting small businesses in Canada, and legacy Bureau products.
Exploring Ceridian HCM Holding's Low Altman Z-Score
A dissection of Ceridian HCM Holding's Altman Z-score reveals Ceridian HCM Holding's financial health may be weak, suggesting possible financial distress:
Operational Efficiency and Asset Turnover
When it comes to operational efficiency, a vital indicator for Ceridian HCM Holding is its asset turnover. The data: 2021: 0.14; 2022: 0.13; 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 Ceridian HCM Holding's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
Despite its attractive valuation, Ceridian HCM Holding (NYSE:CDAY) may be a potential value trap due to its low Altman Z-score and declining asset turnover. Therefore, it is crucial for investors to conduct thorough due diligence 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.
