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 10.19, recorded a gain of 12.22% in a day and a 3-month decrease of 29.93%. The stock's fair valuation is $21.53, 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 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.
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. 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
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 Controladora Vuela Compania de Aviacion SAB de CV should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.75. 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.
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
Controladora Vuela Compania de Aviacion SAB de CV is a low-cost airline flying to Mexico, the United States, Central and South America. It 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. The company uses promotional fares to stimulate demand and the base fares are priced to compete with long-distance bus fares in Mexico. Revenues from the air transportation of passengers are recognized earlier when the service is provided or when the non-refundable ticket expires at the date of the scheduled travel.
Analyzing Controladora Vuela Compania de Aviacion SAB de CV's Low Altman Z-Score
A dissection of Controladora Vuela Compania de Aviacion SAB de CV's Altman Z-score reveals the company's financial health may be weak, suggesting possible financial distress. This potential instability could significantly impact the company's future performance and return on investment, making it a potential value trap.
Conclusion: A Value Trap?
While Controladora Vuela Compania de Aviacion SAB de CV may initially appear to be an undervalued investment opportunity, the company's low Altman Z-score and potential financial instability suggest that it may be a value trap. Investors should exercise caution and conduct thorough due diligence before making an investment decision.
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This article first appeared on GuruFocus.
