Is Sunrun (RUN) 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 Sunrun Inc (NASDAQ:RUN). The stock, which is currently priced at $13.77, recorded a loss of 1.57% in a day and a 3-month decrease of 26%. The stock's fair valuation is $43.63, 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.
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.
Assessing the Risks of Sunrun (NASDAQ:RUN)
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 Sunrun should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.2. These indicators suggest that Sunrun, 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 Introduction
Sunrun is engaged in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. The company acquires customers directly and through relationships with various solar and strategic partners. The solar systems are constructed either by Sunrun or by Sunrun's partners and are owned by the company. Sunrun's customers typically enter into 20- to 25-year agreements to utilize its solar energy system. The company also sells solar energy systems and products, such as panels and racking, and solar leads generated to customers.
Sunrun's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Sunrun's Altman Z-score reveals Sunrun's financial health may be weak, suggesting possible financial distress:
Conclusion
Despite its attractive valuation, Sunrun (NASDAQ:RUN) presents significant risks that should not be overlooked. The company's low Altman Z-Score and other financial indicators suggest that it may be a potential value trap. Therefore, it is crucial for investors 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.
