Stock Analysis

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

BMV:CEMEX CPO
Source: Shutterstock

Key Insights

  • CEMEX. de's estimated fair value is Mex$11.30 based on 2 Stage Free Cash Flow to Equity
  • CEMEX. de's Mex$11.05 share price indicates it is trading at similar levels as its fair value estimate
  • Analyst price target for CEMEX CPO is US$13.60, which is 20% above our fair value estimate

Does the May share price for CEMEX, S.A.B. de C.V. (BMV:CEMEXCPO) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for CEMEX. de

The Method

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. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF ($, Millions) US$620.2m US$934.8m US$1.08b US$1.20b US$1.33b US$1.45b US$1.58b US$1.72b US$1.86b US$2.01b
Growth Rate Estimate Source Analyst x6 Analyst x6 Analyst x4 Est @ 11.52% Est @ 10.33% Est @ 9.50% Est @ 8.91% Est @ 8.50% Est @ 8.22% Est @ 8.02%
Present Value ($, Millions) Discounted @ 18% US$525 US$669 US$653 US$616 US$575 US$533 US$491 US$451 US$413 US$377

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$5.3b

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 (7.6%) 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 18%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$2.0b× (1 + 7.6%) ÷ (18%– 7.6%) = US$20b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$20b÷ ( 1 + 18%)10= US$3.8b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$9.1b. 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$11.1, the company appears about fair value at a 2.2% 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.

dcf
BMV:CEMEX CPO Discounted Cash Flow May 24th 2023

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 CEMEX. 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 18%, which is based on a levered beta of 1.155. 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 CEMEX. de

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings.
Weakness
  • No major weaknesses identified for CEMEX CPO.
Opportunity
  • Annual earnings are forecast to grow faster than the Mexican market.
  • Current share price is below our estimate of fair value.
Threat
  • Debt is not well covered by operating cash flow.
  • Annual revenue is forecast to grow slower than the Mexican market.

Next Steps:

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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For CEMEX. de, there are three important factors you should look at:

  1. Risks: For example, we've discovered 2 warning signs for CEMEX. de (1 is a bit concerning!) that you should be aware of before investing here.
  2. Future Earnings: How does CEMEX CPO'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the BMV every day. If you want to find the calculation for other stocks 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.