– By GF Value
The stock of CoreCivic (NYSE:CXW, 30-year Financials) is believed to be 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 $9.11 per share and the market cap of $1.1 billion, CoreCivic stock appears to be possible value trap. GF Value for CoreCivic is shown in the chart below.
The reason we think that CoreCivic stock might be a value trap is because CoreCivic has an Altman Z-score of 0.88, 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.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. CoreCivic has a cash-to-debt ratio of 0.06, which which ranks in the middle range of the companies in REITs industry. The overall financial strength of CoreCivic is 4 out of 10, which indicates that the financial strength of CoreCivic is poor. This is the debt and cash of CoreCivic over the past years:
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. CoreCivic has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.9 billion and earnings of $0.45 a share. Its operating margin is 11.75%, which ranks worse than 84% of the companies in REITs industry. Overall, the profitability of CoreCivic is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of CoreCivic over the past years:
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 CoreCivic is 1.9%, which ranks in the middle range of the companies in REITs industry. The 3-year average EBITDA growth is -10.9%, which ranks worse than 69% of the companies in REITs industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, CoreCivic’s return on invested capital is 6.03, and its cost of capital is 5.38. The historical ROIC vs WACC comparison of CoreCivic is shown below:
In short, the stock of CoreCivic (NYSE:CXW, 30-year Financials) shows every sign of being possible value trap. The company’s financial condition is poor and its profitability is fair. Its growth ranks worse than 69% of the companies in REITs industry. To learn more about CoreCivic stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.