Estimating The Fair Value Of Consorcio ARA, S. A. B. de C. V. (BMV:ARA)

Key Insights

• The projected fair value for Consorcio ARA S. A. B. de C. V is Mex$3.46 based on 2 Stage Free Cash Flow to Equity
• Consorcio ARA S. A. B. de C. V's Mex$3.56 share price indicates it is trading at similar levels as its fair value estimate
• Consorcio ARA S. A. B. de C. V's peers are currently trading at a discount of 5.2% on average

How far off is Consorcio ARA, S. A. B. de C. V. (BMV:ARA) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Consorcio ARA S. A. B. de C. V

The Model

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (MX$, Millions)	Mex$463.0m	Mex$509.0m	Mex$552.6m	Mex$599.4m	Mex$649.6m	Mex$703.8m	Mex$762.2m	Mex$825.3m	Mex$893.5m	Mex$967.2m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 8.57%	Est @ 8.46%	Est @ 8.39%	Est @ 8.34%	Est @ 8.30%	Est @ 8.28%	Est @ 8.26%	Est @ 8.25%
Present Value (MX$, Millions) Discounted @ 19%	Mex$388	Mex$357	Mex$324	Mex$295	Mex$267	Mex$243	Mex$220	Mex$199	Mex$181	Mex$164

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$2.6b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (8.2%) 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 19%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = Mex$967m× (1 + 8.2%) ÷ (19%– 8.2%) = Mex$9.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$9.3b÷ ( 1 + 19%)¹⁰= Mex$1.6b

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$4.2b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of Mex$3.6, 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

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 evaluation of a company's future performance, so try the calculation yourself and check your own 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 Consorcio ARA S. A. B. de C. V 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 19%, which is based on a levered beta of 1.631. 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 Consorcio ARA S. A. B. de C. V

Moving On:

Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Consorcio ARA S. A. B. de C. V, we've compiled three essential elements you should look at:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Consorcio ARA S. A. B. de C. V .
2. Future Earnings: How does ARA *'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.