Is Falabella S.A. (SNSE:FALABELLA) Trading At A 26% Discount?

Key Insights

• Falabella's estimated fair value is CL$3,564 based on 2 Stage Free Cash Flow to Equity
• Falabella is estimated to be 26% undervalued based on current share price of CL$2,645
• Analyst price target for FALABELLA is CL$2,281 which is 36% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Falabella S.A. (SNSE:FALABELLA) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Falabella

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CLP, Millions)	CL$661.0b	CL$1.12t	CL$1.02t	CL$996.8b	CL$996.5b	CL$1.01t	CL$1.04t	CL$1.08t	CL$1.12t	CL$1.17t
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ -2.37%	Est @ -0.04%	Est @ 1.60%	Est @ 2.74%	Est @ 3.54%	Est @ 4.10%	Est @ 4.49%
Present Value (CLP, Millions) Discounted @ 14%	CL$579.3k	CL$863.4k	CL$687.4k	CL$588.2k	CL$515.4k	CL$458.9k	CL$413.3k	CL$375.0k	CL$342.2k	CL$313.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CL$5.1t

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (5.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CL$1.2t× (1 + 5.4%) ÷ (14%– 5.4%) = CL$14t

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CL$14t÷ ( 1 + 14%)¹⁰= CL$3.8t

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CL$8.9t. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CL$2.6k, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Falabella 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 accounts for debt. In this calculation we've used 14%, which is based on a levered beta of 1.487. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Falabella

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For Falabella, we've compiled three fundamental elements you should further research:

1. Risks: As an example, we've found 4 warning signs for Falabella (1 is a bit unpleasant!) that you need to consider before investing here.
2. Future Earnings: How does FALABELLA's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SNSE every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.