Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Cohen & Co Inc (COHN, Financial). The stock, which is currently priced at $10.15, recorded a gain of 13.47% in a day and a 3-month increase of 108.94%. The stock's fair valuation is $16.28, 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.
- 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.
Cohen's Financial Health: A Closer Look
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Cohen should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.46. These indicators suggest that Cohen, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Before delving into the details, let's understand what the Altman Z-score entails. 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.
Company Overview: Cohen & Co Inc
Cohen & Co Inc is a United States company that delivers financial services in fixed income markets. It is focused on small-cap banking institutions and has grown to provide an expanding range of capital markets and asset management services. It has three business segments. The Capital Markets segment, which is the key revenue driver, consists of fixed income sales, trading, matched book repo financing, new issue placements in corporate and securitized products, and advisory services. The Asset Management segment manages assets within collateralized debt obligations, managed accounts, joint ventures, and investment funds. The Principal Investing segment is comprised of investments to earn return rather than to support trading, matched book repo, or other Capital Markets segment activities.
Unpacking Cohen's Low Altman Z-Score
A dissection of Cohen's Altman Z-score reveals Cohen's financial health may be weak, suggesting possible financial distress.
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 Cohen's EBIT to Total Assets ratio from historical data (2021: 0.02; 2022: -0.02; 2023: -0.01) indicates a descending trend. This reduction suggests that Cohen 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.
When it comes to operational efficiency, a vital indicator for Cohen is its asset turnover. The data: 2021: 0.03; 2022: 0.01; 2023: 0.06 from the past three years suggests a recent decline following an initial increase in this ratio. The asset turnover 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 Cohen's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion: Navigating the Value Trap
Despite Cohen's seemingly attractive valuation, its low Altman Z-score and declining efficiency ratios suggest that it could be a potential value trap. While the stock may appear undervalued, investors must consider the company's financial health and operational efficiency before making an investment decision. Thorough due diligence is key to avoiding potential pitfalls and making informed investment decisions.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen.
