Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is NextEra Energy Partners LP (NEP, Financial). The stock, which is currently priced at 38.98, recorded a loss of 16.88% in a day and a 3-month decrease of 32.54%. The stock's fair valuation is $79.46, 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. It is calculated based on historical multiples 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. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at.
Is NextEra Energy Partners LP a Value Trap?
Despite its seemingly attractive valuation, certain risk factors associated with NextEra Energy Partners LP should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.43. These indicators suggest that NextEra Energy Partners LP, 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.
A Snapshot of NextEra Energy Partners LP
NextEra Energy Partners LP is formed to acquire, manage and own contracted clean energy projects. It owns interests in wind and solar projects in North America, as well as natural gas infrastructure assets in Texas. The renewable energy projects are fully contracted, use industry technology and are in regions that are favorable for generating energy from the wind and sun. Its natural gas pipelines in the portfolio are all strategically located, serving power producers and municipalities in South Texas, processing plants and producers in the Eagle Ford Shale, and commercial and industrial customers in the Houston area. Renewable energy sales generate maximum revenue for the company.
NextEra Energy Partners LP's Financial Health
A dissection of NextEra Energy Partners LP's Altman Z-score reveals NextEra Energy Partners LP's financial health may be weak, suggesting possible financial distress. The data from the past three years suggests a decreasing trend in its asset turnover ratio. This ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop 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 NextEra Energy Partners LP's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
Despite its seemingly attractive valuation, NextEra Energy Partners LP might be a potential value trap due to its low Altman Z-score and decreasing asset turnover ratio. This complexity underlines the importance of thorough due diligence in investment decision-making. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
