Is Clean Energy Fuels (CLNE) 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 Clean Energy Fuels Corp (NASDAQ:CLNE). The stock, which is currently priced at 4.75, recorded a gain of 7.84% in a day and a 3-month increase of 8.58%. The stock's fair valuation is $10.42, 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.
Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line.
Unpacking 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 Clean Energy Fuels should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.07, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is Clean Energy Fuels a hidden gem or a value trap?
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.
The Company at a Glance
Clean Energy Fuels Corp is a natural gas marketer and retailer operating in the United States and Canada. The company supplies compressed natural gas, liquefied natural gas, and renewable natural gas as an alternative fuel for vehicles. The majority of revenue is generated within the U.S. and mostly consists of compressed natural gas.
Unpacking Clean Energy Fuels's Low Altman Z-Score
A dissection of Clean Energy Fuels's Altman Z-score reveals Clean Energy Fuels'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 Clean Energy Fuels's historical data, 2021: -0.84; 2022: -0.87; 2023: -0.85, we observe a recent decline following an initial increase in this ratio. This downward movement indicates Clean Energy Fuels's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Declining Revenues and Earnings: The Bearish Signs
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Clean Energy Fuels, both the revenue per share (evident from the last five years' TTM data: 2019: 1.59; 2020: 1.65; 2021: 1.12; 2022: 1.61; 2023: 2.08; ) and the 5-year revenue growth rate (-6.8%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Clean Energy Fuels'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
Despite its low price-to-fair-value ratio, Clean Energy Fuels'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 Clean Energy Fuels's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Conclusion
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. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen . 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.
