An intrinsic calculation for La Comer, SAB de CV (BMV:LACOMERUBC) suggests that it is undervalued by 39%
Today we are going to take a simple walkthrough of a valuation method used to estimate the attractiveness of La Comer, SAB de CV (BMV:LACOMERUBC) as an investment opportunity by projecting its future cash flows , then updating them to the current value. This will be done using the discounted cash flow (DCF) model. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
Discover our latest analysis for La Comer. of
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. 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.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-Year Free Cash Flow (FCF) Forecast
|Leveraged FCF (MX$, Millions)||Mexico$1.22 billion||Mexico$1.89 billion||Mexico$2.45 billion||3.01 billion Mexican dollars||Mexico$3.57 billion||Mexico$4.10 billion||Mexico$4.62 billion||Mexico$5.13 billion||Mexico$5.64 billion||Mexico$6.16 billion|
|Growth rate estimate Source||Analyst x1||Analyst x1||Is at 29.9%||East @ 23.1%||Is at 18.34%||Is at 15.01%||Is at 12.68%||Is at 11.05%||Is 9.91%||Is at 9.11%|
|Present value (MX$, millions) discounted at 12%||Mexico$1.1k||Mexican $1,500||Mex$1.7k||Mex$1.9k||Mex$2.0k||Mexico$2.1k||Mexico$2.1k||Mexico$2.1k||Mexico$2.1k||Mex$2.0k|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 19 billion Mexican dollars
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (7.2%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 12%.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = 6.2 billion Mexican dollars × (1 + 7.2%) ÷ (12%–7.2%) = 142 billion Mexican dollars
Present value of terminal value (PVTV)= TV / (1 + r)ten= 142 billion Mexican dollars÷ ( 1 + 12%)ten= 46 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 65 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$36.5, the company appears to be a good value at a 39% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual 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 La Comer. 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 12%, which is based on a leveraged beta of 0.800. 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.
Although important, the DCF calculation is just one of many factors you need to assess for a business. The DCF model is not a perfect stock valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Can we understand why the company is trading at a discount to its intrinsic value? For LaComer. de, there are three important things you need to assess:
- Financial health: Does LACOMER UBC have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
- Future earnings: How does LACOMER UBC’s growth rate compare to its peers and the market in general? 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. Simply Wall St updates its DCF calculation for every Mexican stock daily, so if you want to find the intrinsic value of any other stock, just 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.