Is SBA Communications (SBAC) 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 SBA Communications Corp (NASDAQ:SBAC). The stock, which is currently priced at $204.68, recorded a loss of 4.79% in a day and a 3-month decrease of 7.03%. The stock's fair valuation is $384.74, 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 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.
Is SBA Communications a Value Trap?
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 SBA Communications should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.43. These indicators suggest that SBA Communications, 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.
Company Overview
SBA Communications owns and operates almost 40,000 cell towers throughout North America, South America, and Africa. It leases space on its towers to wireless service providers, who install equipment on the towers to support their wireless networks. The company has a very concentrated customer base, with most revenue in each market being generated by just the top few mobile carriers. The company owns more than 17,000 towers in the U.S., which accounted for about three fourths of the company's total revenue in 2022. Internationally, SBA's greatest presence is in Brazil, where it operates roughly 10,000 towers. SBA operates as a real estate investment trust, or REIT.
Breaking Down SBA Communications's Low Altman Z-Score
A dissection of SBA Communications's Altman Z-score reveals SBA Communications'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 SBA Communications's historical data, 2021: -0.68; 2022: -0.75; 2023: -0.69, we observe a declining trend in this ratio. This downward movement indicates SBA Communications's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Conclusion
While SBA Communications (NASDAQ:SBAC) may appear to be undervalued, the company's low Altman Z-Score and declining Retained Earnings to Total Assets ratio suggest potential financial distress. Therefore, despite its attractive valuation, SBA Communications may be a potential value trap. Investors are advised to conduct thorough due diligence before making an investment decision.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article first appeared on GuruFocus.
