Groupon

Groupon Inc is assigned a 3-star quantitative star rating, indicating our belief that this share class is a balanced choice, but prudent investors should consider looking elsewhere. The stock currently trades at a 25% discount to our quantitative fair value estimate of $24.60 per share; however, caution is warranted due to this estimate's high uncertainty rating. We require the price/fair value ratio to move a certain amount before the star rating can change. This stability-enhancing buffer is in effect for this stock.

The firm's balance sheet bolsters our fair value estimate. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. Reflecting the firm's leverage is its EBITDA/interest coverage ratio of -5.3, which ranks in the bottom 10% compared with peers globally. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. We believe this is a sign that shares could be undervalued.

Alternatively, the company's lack of profitability is potentially concerning. Companies with low profitability are often less resilient in recessions and are likely to generate weaker future cash flows for shareholders. The firm's earnings yield of -1.3%, a core component of profitability, falls in the bottom 30% compared with global peers. The earnings generated by the company relative to its share price is concerning, which, despite our favorable price/fair value ratio, is a negative attribute.

With its quantitative economic moat rating of none, we do not expect this company to materially outearn its cost of capital in the long run. Additionally, the firm's moderate financial health score suggests it is acceptably positioned against adverse economic circumstances.