Is Vornado Realty Trust (VNO) Too Good to Be True? A Comprehensive Analysis of a Potential ...
Value-focused investors are constantly seeking stocks priced below their intrinsic value. One such stock that merits attention is Vornado Realty Trust (NYSE:VNO). Currently priced at $22.94, the stock recorded an 8.97% loss in a day and a 3-month increase of 48.26%. However, the stock's fair valuation, as indicated by its GF Value, is $39.95.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It is calculated based on historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Delving Deeper into Vornado Realty Trust's Financial Health
Investors must consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Vornado Realty Trust should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.11, and the company's revenues and earnings have been on a downward trend over the past five years. This raises the question: Is Vornado Realty Trust a hidden gem or a value trap?
Understanding the Altman Z-Score
The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. It 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
Vornado Realty Trust is a real estate investment trust that owns and has an ownership interest in Class A office and retail properties highly concentrated in Manhattan, with additional properties in San Francisco and Chicago. Despite its low price, the company's declining revenues and earnings, along with a low Altman Z-score, suggest that it might be a potential value trap.
Examining Vornado Realty Trust's Financial Health
A closer look at Vornado Realty Trust's Altman Z-score suggests 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 Vornado Realty Trust's historical data, we observe a declining trend in this ratio, indicating a diminishing ability to reinvest in its business or effectively manage its debt.
Declining Revenues and Earnings: A Cause for Concern
A sustained decline in revenues is often a sign of a company's potential trouble. In the case of Vornado Realty Trust, both the revenue per share and the 5-year revenue growth rate have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Vornado Realty Trust's products, or escalating competition in its market sector.
More worrying is the negative 3-year EBITDA growth rate and the 5-year EBITDA growth rate. This could indicate structural problems within the company, as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is often used as a measure of a company's operating performance.
Conclusion
Despite its low price-to-fair-value ratio, Vornado Realty Trust's falling revenues and earnings cast a long shadow over its investment attractiveness. Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.
GuruFocus Premium members can find stocks with high Altman Z-Score using the Walter Schloss Screen . Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
This article first appeared on GuruFocus.
