Myomo Inc (MYO): A Hidden Gem or 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 Myomo Inc (MYO). The stock, which is currently priced at 0.75, recorded a gain of 18.82% in a day and a 3-month increase of 64.8%. The stock's fair valuation is $1.4, 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. 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 Myomo's Risk Factors
Despite its seemingly attractive valuation, certain risk factors associated with Myomo should not be ignored. These risks are primarily reflected through its low Altman Z-score of -8.03, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is Myomo a hidden gem or a value trap? These indicators suggest that Myomo, 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.
A Snapshot of Myomo Inc (MYO)
Myomo Inc is a wearable medical robotics company that develops, designs, and produces myoelectric orthotics for people with neuromuscular disorders. The MyoPro myoelectric upper limb orthosis product is registered with the Food and Drug Administration as a Class II medical device. The company provides the device to patients and bills their insurance companies directly, sometimes utilizing the clinical services of orthotics and prosthetics providers for which a fee is paid. The company sells the product to orthotics and prosthetics providers around the world and the Veterans Health Administration (VA).
Myomo's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Myomo's Altman Z-score reveals Myomo's financial health may be weak, suggesting possible financial distress:
The first factor we need to consider is a measure of short-term liquidity. This is calculated as the working capital divided by total assets. When we evaluate the data provided: 2021: 0.11; 2022: 0.08; 2023: 0.02, it's clear that Myomo has experienced a declining trend in its Working Capital to Total Assets ratio over the past few years. This decline suggests potential liquidity issues that the company may be facing. The ratio is strikingly low, which unfavorably influences the overall Z-Score.
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Myomo's historical data, 2021: -4.14; 2022: -5.75; 2023: -6.95, we observe a declining trend in this ratio. This downward movement indicates Myomo's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Myomo's EBIT to Total Assets ratio from historical data (2021: -0.56; 2022: -0.71; 2023: -0.66) indicates a recent dip following an initial rise. This reduction suggests that Myomo might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
The Bearish Signs: Declining Revenues and Earnings
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Myomo, both the revenue per share (evident from the last five years' TTM data: 2019: 6.82; 2020: 4.57; 2021: 2.31; 2022: 2.46; 2023: 1.45; ) and the 5-year revenue growth rate (-28.7%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Myomo'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, Myomo'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 Myomo's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations. 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.
Conclusion
In conclusion, despite its seemingly attractive valuation, Myomo's financial health and declining revenues and earnings suggest that it may be a potential value trap. Investors need to perform thorough due diligence and consider all underlying risk factors before making an investment decision. 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.
