Investing in Apellis Pharmaceuticals (APLS): Navigating the Thin Line Between Value and 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 Apellis Pharmaceuticals Inc (NASDAQ:APLS). The stock, currently priced at 42.83, recorded a loss of 0.63% in a day and a 3-month decrease of 52.44%. The stock's fair valuation is $102.3, as indicated by its GF Value.
Understanding 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 historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance.
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.
Investment Risks in Apellis Pharmaceuticals
Despite its seemingly attractive valuation, certain risk factors associated with Apellis Pharmaceuticals (NASDAQ:APLS) should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.28, and a Beneish M-Score of 5.27 that exceeds -1.78, the threshold for potential earnings manipulation. These indicators suggest that Apellis Pharmaceuticals, despite its apparent undervaluation, might be a potential value trap.
Understanding Altman Z-score and Beneish M-Score
The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame, combining five different financial ratios. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
The Beneish M-Score is based on eight financial variables that reflect different aspects of a company's financial performance and position. These include Days Sales Outstanding (DSO), Gross Margin (GM), Total Long-term Assets Less Property, Plant and Equipment over Total Assets (TATA), change in Revenue (?REV), change in Depreciation and Amortization (?DA), change in Selling, General and Admin expenses (?SGA), change in Debt-to-Asset Ratio (?LVG), and Net Income Less Non-Operating Income and Cash Flow from Operations over Total Assets (?NOATA).
Company Snapshot: Apellis Pharmaceuticals
Apellis Pharmaceuticals Inc is a clinical-stage biopharmaceutical company focused on the development of novel therapeutic compounds to treat disease through the inhibition of the complement system, an integral component of the immune system, at the level of C3, the central protein in the complement cascade. The company's market cap stands at $5 billion with sales amounting to $184.50 million.
Analyzing Apellis Pharmaceuticals's Low Altman Z-Score
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Apellis Pharmaceuticals's historical data, we observe a declining trend in this ratio, indicating Apellis Pharmaceuticals's diminishing ability to reinvest in its business or effectively manage its debt.
When it comes to operational efficiency, a vital indicator for Apellis Pharmaceuticals (NASDAQ:APLS) is its asset turnover. The data from the past three years suggests a recent decline following an initial increase in this ratio, signifying reduced operational efficiency.
The days sales outstanding (DSO) is an important financial metric that denotes the average time a company takes to collect payment after a sale is completed. A rising trend in Apellis Pharmaceuticals's DSO might indicate aggressive revenue recognition practices, and in some cases, potential earnings manipulation.
Next is the leverage index, which is computed as the change in the Debt-to-Asset Ratio. An increase in this ratio may suggest that the company is taking on more debt, thereby potentially inflating earnings.
Conclusion: Apellis Pharmaceuticals as a Value Trap
Despite the seemingly undervalued status of Apellis Pharmaceuticals, the company's financial indicators suggest potential risks. These include a low Altman Z-Score and a high Beneish M-Score, indicating possible financial distress and potential earnings manipulation. Thus, Apellis Pharmaceuticals (NASDAQ:APLS) may be a potential value trap, highlighting the need for thorough due diligence in investment decision-making.
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This article first appeared on GuruFocus.
