Is T2 Biosystems a Hidden Gem or a Value Trap? An In-Depth Analysis
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is T2 Biosystems Inc (NASDAQ:TTOO). The stock, which is currently priced at 0.39, recorded a loss of 18.79% in a day and a 3-month increase of 238.47%. The stock's fair valuation is $2.74, 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, 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.
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 T2 Biosystems should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of -24.82, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is T2 Biosystems a hidden gem or a value trap?
Decoding the Piotroski F-score and Altman Z-score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/ source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. T2 Biosystems's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
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: T2 Biosystems Inc
T2 Biosystems Inc provides rapid in vitro diagnostic tests to hospitals and laboratories. The company's core technology is T2 Magnetic Resonance (T2MR) technology, which can detect a variety of molecular targets directly from whole blood. T2MR technology enables the T2Dx system, which is fully automated from patient sample to result for its panels focused on bacterial and fungal infections that could cause sepsis, and its pipeline panel for Lyme disease.
Despite its promising technology and mission, T2 Biosystems has been facing financial challenges, reflected in its low Piotroski F-score and Altman Z-score. These indicators suggest that T2 Biosystems, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
This is the income breakdown of T2 Biosystems:
Analysis of T2 Biosystems's' Profitability
Firstly, let's address profitability. One significant component of the F-Score is a positive return on assets (ROA). A closer look at T2 Biosystems's ROA reveals a worrying trend of negative returns. This indicates the company's inability to generate profit from its assets - a fundamental concern for any investor.
Let's delve deeper into T2 Biosystems's financial health by examining the decline in its return on assets (ROA) over the past three years. The data indicates 2021: -61.64; 2022: -101.70; 2023: -137.92, when expressed in percentages. Such a decrease is concerning, as the Piotroski F-Score penalizes companies with lower current ROA compared to the previous period. This ongoing decline highlights another potential risk associated with investing in T2 Biosystems.
This article first appeared on GuruFocus.
