Estimating The Intrinsic Value Of Corporación Moctezuma, S.A.B. de C.V. (BMV:CMOCTEZ)

Key Insights

• The projected fair value for Corporación Moctezuma. de is Mex$104 based on 2 Stage Free Cash Flow to Equity
• Corporación Moctezuma. de's Mex$84.00 share price indicates it is trading at similar levels as its fair value estimate
• The average premium for Corporación Moctezuma. de's competitorsis currently 369%

Does the May share price for Corporación Moctezuma, S.A.B. de C.V. (BMV:CMOCTEZ) 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. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

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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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (MX$, Millions)	Mex$6.17b	Mex$6.50b	Mex$6.95b	Mex$7.41b	Mex$7.95b	Mex$8.54b	Mex$9.20b	Mex$9.92b	Mex$10.7b	Mex$11.6b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 6.73%	Est @ 7.18%	Est @ 7.49%	Est @ 7.71%	Est @ 7.86%	Est @ 7.97%	Est @ 8.04%
Present Value (MX$, Millions) Discounted @ 15%	Mex$5.4k	Mex$4.9k	Mex$4.6k	Mex$4.3k	Mex$4.0k	Mex$3.7k	Mex$3.5k	Mex$3.3k	Mex$3.1k	Mex$2.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$40b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 15%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = Mex$12b× (1 + 8.2%) ÷ (15%– 8.2%) = Mex$192b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$192b÷ ( 1 + 15%)¹⁰= Mex$49b

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 Mex$89b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of Mex$84.0, the company appears about fair value at a 19% 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.

Important 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 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 15%, which is based on a levered beta of 0.947. 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.

See our latest analysis for Corporación Moctezuma. de

SWOT Analysis for Corporación Moctezuma. de

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. 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. For Corporación Moctezuma. de, there are three important aspects you should look at:

1. Risks: For instance, we've identified 2 warning signs for Corporación Moctezuma. de (1 is a bit unpleasant) you should be aware of.
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 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.