Is Controladora Vuela Compania de Aviacion SAB de CV (VLRS) Too Good to Be True? 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 Controladora Vuela Compania de Aviacion SAB de CV (NYSE:VLRS). The stock, which is currently priced at 9.86, recorded a loss of 3.24% in a day and a 3-month decrease of 32.16%. The stock's fair valuation is $21.64, 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.
Our belief is that the GF Value Line indicates the fair value at which the stock should be traded. The stock price will most likely fluctuate around the GF Value Line. 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.
Unpacking the Risks
Despite its seemingly attractive valuation, certain risk factors associated with Controladora Vuela Compania de Aviacion SAB de CV should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.77. These indicators suggest that Controladora Vuela Compania de Aviacion SAB de CV, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Deciphering the Altman Z-Score
The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. Invented by New York University Professor Edward I. Altman in 1968, the 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
Controladora Vuela Compania de Aviacion SAB de CV operates as a low-cost airline flying to Mexico, the United States, Central and South America. It currently operates up to 500 average daily flight segments on routes that connect 44 cities in Mexico as well as 22 cities in the United States, four in Central America and two in South America. Here is the income breakdown of Controladora Vuela Compania de Aviacion SAB de CV:
Dissecting Controladora Vuela Compania de Aviacion SAB de CV's Altman Z-Score
A closer look at Controladora Vuela Compania de Aviacion SAB de CV's Altman Z-score reveals that the company's financial health may be weak, suggesting possible financial distress.
Conclusion
While Controladora Vuela Compania de Aviacion SAB de CV's stock appears to be undervalued, its low Altman Z-Score indicates a high probability of financial distress, making it a potential value trap. Investors are advised to conduct thorough research and exercise caution when considering this stock. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article first appeared on GuruFocus.
