Calculation of the intrinsic value of Aleatica, SAB de CV (BMV:ALEATIC)
Does Aleatica, SAB de CV’s (BMV:ALEATIC) stock price in May reflect what it’s really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows of the business and discounting them to the present value. On this occasion, we will use the Discounted Cash Flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
Check out our latest analysis for Aleatica. of
Is Aleatica. of fair value?
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To start, we need to estimate the cash flows for the next ten years. Since no analyst estimate of free cash flow is available, we have extrapolated the previous free cash flow (FCF) from the company’s latest 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, and so the sum of these future cash flows is then discounted to today’s value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (MX$, Millions) | Mexico$2.92 billion | Mexico$2.81 billion | Mexico$2.79 billion | Mexico$2.83 billion | Mexico$2.93 billion | Mexico$3.06 billion | Mexico$3.22 billion | Mexico$3.41 billion | Mexico$3.62 billion | Mexico$3.85 billion |
Growth rate estimate Source | Is @ -8.78% | Is @ -4.01% | Is @ -0.66% | Is at 1.67% | East @ 3.31% | Is at 4.46% | Is at 5.26% | Is at 5.82% | Is at 6.21% | Is at 6.49% |
Present value (MX$, millions) discounted at 14% | Mexico$2.6k | Mexico$2.1k | Mex$1.9k | Mex$1.7k | Mexican $1,500 | Mexico$1.4k | Mex$1.3k | Mexico$1.2k | Mexico$1.1k | Mexican $1,000 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 16 billion Mexican dollars
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. 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 (7.1%) 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 14%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = 3.9 billion Mexican dollars × (1 + 7.1%) ÷ (14%–7.1%) = 57 billion Mexican dollars
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= 57 billion Mexican dollars÷ ( 1 + 14%)^{ten}= 15 billion Mexican dollars
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 30 billion Mexican pesos. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of Mex$17.7, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
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. Given that we are watching Aleatica. 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 14%, which is based on a leveraged beta of 1.247. 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.
Let’s move on :
While a business valuation is important, it shouldn’t be the only metric to consider when researching a business. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Alaitica. de, we’ve compiled three more things you should consider:
- Risks: Take for example the ubiquitous specter of investment risk. We have identified 2 warning signs with Aleatica. of , and understanding them should be part of your investment process.
- 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!
- Other environmentally friendly businesses: Are you concerned about the environment and do you think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover actions you might not have thought of!
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.