Value investors are always on the lookout for stocks trading below their intrinsic value. One such stock that warrants consideration is Catalent Inc (CTLT, Financial). Currently priced at $47.46, the stock recorded a daily gain of 4.77% and a three-month increase of 32.78%. However, according to its Fair Value (GF Value), the stock's fair valuation stands at $99.08.
Understanding the GF Value
The GF Value represents a stock's current intrinsic value derived from GuruFocus' exclusive method. The GF Value Line provides an overview of the stock's fair value. It is calculated based on 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.
If the stock price significantly exceeds 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.
Identifying Potential Risks
Despite its seemingly attractive valuation, Catalent (CTLT, Financial) carries certain risk factors that should not be overlooked. These risks are primarily reflected through its low Altman Z-score of 1.46. These indicators suggest that Catalent, despite its apparent undervaluation, might be a potential value trap. This complexity underscores the importance of thorough due diligence in investment decision-making.
Decoding the Altman Z-Score
The Altman Z-score is a financial model invented by New York University Professor Edward I. Altman in 1968. It 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
Catalent is a contract development and manufacturing organization, or CDMO. It operates under four segments: biologics, softgel and oral technologies, oral and specialty delivery, and clinical supply services. Catalent derives its revenues primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Catalent has over 50 facilities across four continents.
Unpacking Catalent's Low Altman Z-Score
An analysis of Catalent's Altman Z-score reveals potential financial distress. The EBIT to Total Assets ratio, which correlates earnings before interest and taxes (EBIT) to total assets, suggests that Catalent might not be utilizing its assets to their full potential to generate operational profits. This could be negatively affecting the company's overall Z-score.
Another vital indicator for Catalent is its asset turnover. A decreasing trend in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in Catalent's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
In conclusion, despite its seemingly undervalued price, Catalent (CTLT, Financial) might be a potential value trap due to its low Altman Z-Score and decreasing asset turnover. Therefore, investors should exercise caution and conduct thorough due diligence before considering an investment in Catalent.
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