Is Uniti Group (UNIT) 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 Uniti Group Inc (NASDAQ:UNIT). The stock, which is currently priced at 4.89, recorded a loss of 8.78% in a day and a 3-month increase of 20.2%. The stock's fair valuation is $10.42, 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.
Unpacking the Risks
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 Uniti Group (NASDAQ:UNIT) should not be ignored. These risks are primarily reflected through its low Altman Z-score of -0.82. These indicators suggest that Uniti Group, 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
Uniti Group is a REIT with about 135,000 route miles of fiber in the U.S., primarily in the Southeast. Uniti reports its business in two segments: leasing and fiber. Leasing currently makes up about 75% of total revenue and consists mostly of Uniti's master lease agreement with Windstream. Uniti was spun out of Windstream in 2015 with a substantial portion of Windstream's network assets, and it immediately leased the entire portfolio back for Windstream's exclusive use. Other leasing revenue stems from sale-leaseback transactions with other fiber holders. Uniti generates fiber revenue by leasing dark and lit fiber to wireless carriers and other enterprises.
The Low Altman Z-Score of Uniti Group
A dissection of Uniti Group's Altman Z-score reveals Uniti Group's financial health may be weak, suggesting possible financial distress.
Conclusion: The Uniti Group Dilemma
Despite its seemingly attractive valuation, the financial indicators suggest that Uniti Group might be a potential value trap. This underscores the importance of conducting a thorough analysis 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.
