Value investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is StoneCo Ltd (STNE, Financial). The stock, which is currently priced at 10.65, recorded a gain of 3.9% in a day and a 3-month decrease of 15.8%. The stock's fair valuation is $29.04, 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.
StoneCo: A Closer Look
Despite its seemingly attractive valuation, certain risk factors associated with StoneCo should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.13. These indicators suggest that StoneCo, 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
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.
StoneCo's Business Profile
StoneCo Ltd is a provider of financial technology solutions. The company offers solutions that empower merchants to conduct electronic commerce seamlessly across in-store, online, and mobile channels in Brazil. Its Stone Business Model combines advanced, end-to-end, cloud-based technology platforms; differentiated hyper-local and integrated distribution approaches; and white-glove, on-demand customer service.
Breaking Down StoneCo's Low Altman Z-Score
A dissection of StoneCo's Altman Z-score reveals StoneCo's financial health may be weak, suggesting 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 StoneCo's historical data, 2021: 0.06; 2022: -0.02; 2023: 0.00, we observe a declining trend in this ratio. This downward movement indicates StoneCo's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of StoneCo's EBIT to Total Assets ratio from historical data (2021: 0.06; 2022: -0.04; 2023: 0.10) indicates a recent dip following an initial rise. This reduction suggests that StoneCo might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Conclusion: Navigating the StoneCo Value Trap
While StoneCo's current valuation may seem attractive, the low Altman Z-Score and declining financial ratios suggest potential financial distress. These indicators, coupled with the stock's price being significantly below the GF Value Line, suggest that StoneCo could be a value trap. As always, thorough due diligence is essential before making any investment decision.
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