A Look At The Intrinsic Value Of Grupo Carso, S.A.B. de C.V. (BMV:GCARSOA1)

Key Insights

• Grupo Carso. de's estimated fair value is Mex$103 based on 2 Stage Free Cash Flow to Equity
• Grupo Carso. de's Mex$116 share price indicates it is trading at similar levels as its fair value estimate
• The Mex$124 analyst price target for GCARSO A1 is 20% more than our estimate of fair value

Today we will run through one way of estimating the intrinsic value of Grupo Carso, S.A.B. de C.V. (BMV:GCARSOA1) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Grupo Carso. de

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (MX$, Millions)	Mex$13.5b	Mex$15.2b	Mex$16.8b	Mex$18.5b	Mex$20.2b	Mex$21.9b	Mex$23.8b	Mex$25.8b	Mex$27.9b	Mex$30.2b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 10.42%	Est @ 9.67%	Est @ 9.14%	Est @ 8.78%	Est @ 8.52%	Est @ 8.34%	Est @ 8.21%	Est @ 8.13%
Present Value (MX$, Millions) Discounted @ 14%	Mex$11.8k	Mex$11.7k	Mex$11.3k	Mex$10.8k	Mex$10.3k	Mex$9.8k	Mex$9.3k	Mex$8.8k	Mex$8.3k	Mex$7.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$100b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 7.9%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = Mex$30b× (1 + 7.9%) ÷ (14%– 7.9%) = Mex$506b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$506b÷ ( 1 + 14%)¹⁰= Mex$132b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is Mex$232b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of Mex$116, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Grupo Carso. de 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 0.997. 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 Grupo Carso. de

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Grupo Carso. de, we've compiled three fundamental items you should further research:

1. Risks: Be aware that Grupo Carso. de is showing 1 warning sign in our investment analysis , you should know about...
2. Future Earnings: How does GCARSO A1'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Mexican stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.

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