Stock Analysis

# Is Grupo Bimbo, S.A.B. de C.V. (BMV:BIMBOA) Expensive For A Reason? A Look At Its Intrinsic Value

Today we will run through one way of estimating the intrinsic value of Grupo Bimbo, S.A.B. de C.V. (BMV:BIMBOA) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

See our latest analysis for Grupo Bimbo. de

### Step by step through the calculation

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

 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Levered FCF (MX\$, Millions) Mex\$14.9b Mex\$15.3b Mex\$13.5b Mex\$12.6b Mex\$12.4b Mex\$12.4b Mex\$12.7b Mex\$13.2b Mex\$13.9b Mex\$14.6b Growth Rate Estimate Source Analyst x3 Analyst x3 Est @ -11.82% Est @ -6.17% Est @ -2.21% Est @ 0.56% Est @ 2.5% Est @ 3.85% Est @ 4.8% Est @ 5.47% Present Value (MX\$, Millions) Discounted @ 12% Mex\$13.3k Mex\$12.1k Mex\$9.5k Mex\$7.9k Mex\$6.9k Mex\$6.2k Mex\$5.6k Mex\$5.2k Mex\$4.8k Mex\$4.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex\$76b

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 7.0%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = Mex\$15b× (1 + 7.0%) ÷ (12%– 7.0%) = Mex\$290b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= Mex\$290b÷ ( 1 + 12%)10= Mex\$90b

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\$166b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of Mex\$49.7, the company appears reasonably expensive 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. 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 Bimbo. 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 12%, which is based on a levered beta of 0.860. 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.

### Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. Can we work out why the company is trading at a premium to intrinsic value? For Grupo Bimbo. de, we've put together three pertinent aspects you should further examine:

1. Risks: Every company has them, and we've spotted 2 warning signs for Grupo Bimbo. de you should know about.
2. Future Earnings: How does BIMBO A'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. 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.
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### About BMV:BIMBO A

#### Grupo Bimbo. de

Produces, distributes, and sells various bakery products.

Low and slightly overvalued.