A Look At The Fair Value Of Grupo Gigante, S. A. B. de C. V. (BMV:GIGANTE)

Key Insights

• The projected fair value for Grupo Gigante S. A. B. de C. V is Mex$17.81 based on 2 Stage Free Cash Flow to Equity
• Current share price of Mex$20.95 suggests Grupo Gigante S. A. B. de C. V is potentially trading close to its fair value
• Grupo Gigante S. A. B. de C. V's peers seem to be trading at a higher premium to fair value based onthe industry average of -346%

How far off is Grupo Gigante, S. A. B. de C. V. (BMV:GIGANTE) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.

Check out our latest analysis for Grupo Gigante S. A. B. de C. V

Step By Step Through The Calculation

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. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (MX$, Millions)	Mex$2.60b	Mex$2.56b	Mex$2.59b	Mex$2.67b	Mex$2.79b	Mex$2.94b	Mex$3.12b	Mex$3.32b	Mex$3.54b	Mex$3.79b
Growth Rate Estimate Source	Est @ -5.42%	Est @ -1.53%	Est @ 1.19%	Est @ 3.10%	Est @ 4.44%	Est @ 5.37%	Est @ 6.02%	Est @ 6.48%	Est @ 6.80%	Est @ 7.03%
Present Value (MX$, Millions) Discounted @ 20%	Mex$2.2k	Mex$1.8k	Mex$1.5k	Mex$1.3k	Mex$1.1k	Mex$1.0k	Mex$894	Mex$797	Mex$712	Mex$637

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$12b

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 20%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = Mex$3.8b× (1 + 7.6%) ÷ (20%– 7.6%) = Mex$34b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$34b÷ ( 1 + 20%)¹⁰= Mex$5.7b

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$18b. 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$21.0, 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.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Grupo Gigante 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 20%, which is based on a levered beta of 1.297. 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:

Whilst important, the DCF calculation 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. 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 Grupo Gigante S. A. B. de C. V, we've compiled three important aspects you should consider:

1. Risks: As an example, we've found 2 warning signs for Grupo Gigante S. A. B. de C. V (1 doesn't sit too well with us!) that you need to consider before investing here.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.