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Vistra Stock Is Estimated To Be Possible Value Trap

·4 min read

- By GF Value

The stock of Vistra (NYSE:VST, 30-year Financials) gives every indication of being possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock 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. At its current price of $16.38 per share and the market cap of $7.9 billion, Vistra stock gives every indication of being possible value trap. GF Value for Vistra is shown in the chart below.


Vistra Stock Is Estimated To Be Possible Value Trap
Vistra Stock Is Estimated To Be Possible Value Trap

The reason we think that Vistra stock might be a value trap is because Vistra has an Altman Z-score of 0.31, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.

Link: These companies may deliever higher future returns at reduced risk.

Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Vistra has a cash-to-debt ratio of 0.05, which is worse than 82% of the companies in the industry of Utilities - Independent Power Producers. GuruFocus ranks the overall financial strength of Vistra at 2 out of 10, which indicates that the financial strength of Vistra is poor. This is the debt and cash of Vistra over the past years:

Vistra Stock Is Estimated To Be Possible Value Trap
Vistra Stock Is Estimated To Be Possible Value Trap

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Vistra has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $11.8 billion and loss of $3.03 a share. Its operating margin is -10.02%, which ranks worse than 83% of the companies in the industry of Utilities - Independent Power Producers. Overall, the profitability of Vistra is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Vistra over the past years:

Vistra Stock Is Estimated To Be Possible Value Trap
Vistra Stock Is Estimated To Be Possible Value Trap

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Vistra is 22.4%, which ranks better than 86% of the companies in the industry of Utilities - Independent Power Producers. The 3-year average EBITDA growth is 31.7%, which ranks better than 89% of the companies in the industry of Utilities - Independent Power Producers.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Vistra's return on invested capital is -4.06, and its cost of capital is 4.86. The historical ROIC vs WACC comparison of Vistra is shown below:

Vistra Stock Is Estimated To Be Possible Value Trap
Vistra Stock Is Estimated To Be Possible Value Trap

In conclusion, Vistra (NYSE:VST, 30-year Financials) stock is believed to be possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 89% of the companies in the industry of Utilities - Independent Power Producers. To learn more about Vistra stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.