A look at the intrinsic value of Alsea, SAB de CV (BMV: ALSEA)
In this article, we will estimate the intrinsic value of Alsea, SAB de CV (BMV:ALSEA) by estimating the company’s future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There really isn’t much to do, although it may seem quite complex.
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one of many evaluation metrics, and it is not without its flaws. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
See our latest analysis for Alsea. of
The calculation
We use what is called a 2-stage model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (MX$, Millions) | Mexico$2.84 billion | 2.02 billion Mexican dollars | Mexico$4.98 billion | Mexico$5.57 billion | Mexico$6.08 billion | Mexico$6.61 billion | Mexico$7.15 billion | Mexico$7.71 billion | Mexico$8.30 billion | Mexico$8.92 billion |
Growth rate estimate Source | Analyst x3 | Analyst x2 | Analyst x1 | Analyst x1 | Is at 9.27% | Is at 8.63% | Is at 8.18% | Is at 7.87% | Is at 7.64% | Is at 7.49% |
Present value (MX$, millions) discounted at 18% | Mexico$2.4k | Mexico$1.4k | Mex$3.0k | Mexico$2.9k | Mexico$2.6k | Mexico$2.4k | Mexico$2.2k | Mex$2.0k | Mex$1.8k | Mex$1.7k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 23 billion Mexican dollars
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 7.1%. We discount terminal cash flows to present value at a cost of equity of 18%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = MX$8.9 billion × (1 + 7.1%) ÷ (18%–7.1%) = MX$86 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= Mex$86b÷ ( 1 + 18%)^{ten}= 16 billion Mexican dollars
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 39 billion Mexican pesos. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of Mex$45.0, the company appears to be about fair value at a 2.7% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we are looking at Alsea. as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which factors in debt. In this calculation, we used 18%, which is based on a leveraged beta of 1.901. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Look forward:
While important, calculating DCF shouldn’t be the only metric to consider when researching a business. The DCF model is not a perfect stock valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For Alsea. de, we have compiled three fundamental elements that you should evaluate:
- Risks: For this purpose, you must know the 1 warning sign we spotted with Alsea. of .
- Future earnings: How does ALSEA*’s growth rate compare to its peers and the wider market? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the BMV every day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.