A Look At The Fair Value Of Corporación Moctezuma, S.A.B. de C.V. (BMV:CMOCTEZ)

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Corporación Moctezuma, S.A.B. de C.V. (BMV:CMOCTEZ) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for Corporación Moctezuma. de

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. 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) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (MX$, Millions)	Mex$4.40b	Mex$4.96b	Mex$4.31b	Mex$4.01b	Mex$3.90b	Mex$3.91b	Mex$4.00b	Mex$4.15b	Mex$4.35b	Mex$4.60b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ -6.98%	Est @ -2.71%	Est @ 0.27%	Est @ 2.36%	Est @ 3.83%	Est @ 4.85%	Est @ 5.57%
Present Value (MX$, Millions) Discounted @ 12%	Mex$3.9k	Mex$3.9k	Mex$3.0k	Mex$2.5k	Mex$2.2k	Mex$2.0k	Mex$1.8k	Mex$1.7k	Mex$1.5k	Mex$1.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$24b

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 7.2%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = Mex$4.6b× (1 + 7.2%) ÷ (12%– 7.2%) = Mex$99b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$99b÷ ( 1 + 12%)¹⁰= Mex$31b

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$55b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of Mex$62.0, the company appears about fair value at a 2.6% discount to where the stock price trades currently. 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

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 Corporación Moctezuma. 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 0.853. 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.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Corporación Moctezuma. de, we've compiled three essential factors you should consider:

1. Risks: We feel that you should assess the 1 warning sign for Corporación Moctezuma. de we've flagged before making an investment in the company.
2. Future Earnings: How does CMOCTEZ *'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.