Estimating The Intrinsic Value Of El Puerto de Liverpool, S.A.B. de C.V. (BMV:LIVEPOLC-1)

How far off is El Puerto de Liverpool, S.A.B. de C.V. (BMV:LIVEPOLC-1) 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 expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for El Puerto de Liverpool. de

The model

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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) estimate

	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
Levered FCF (MX$, Millions)	Mex$4.37b	Mex$6.17b	Mex$8.13b	Mex$6.85b	Mex$9.25b	Mex$10.1b	Mex$11.0b	Mex$11.9b	Mex$12.8b	Mex$13.8b
Growth Rate Estimate Source	Analyst x3	Analyst x4	Analyst x3	Analyst x2	Analyst x2	Est @ 9.44%	Est @ 8.72%	Est @ 8.21%	Est @ 7.86%	Est @ 7.62%
Present Value (MX$, Millions) Discounted @ 15%	Mex$3.8k	Mex$4.7k	Mex$5.4k	Mex$3.9k	Mex$4.6k	Mex$4.4k	Mex$4.2k	Mex$4.0k	Mex$3.7k	Mex$3.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$42b

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 (7.0%) 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)= FCF₂₀₃₀ × (1 + g) ÷ (r – g) = Mex$14b× (1 + 7.0%) ÷ (15%– 7.0%) = Mex$192b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$192b÷ ( 1 + 15%)¹⁰= Mex$48b

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$91b. 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$70.6, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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 El Puerto de Liverpool. 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 1.019. 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:

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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For El Puerto de Liverpool. de, we've compiled three relevant elements you should consider:

1. Risks: For example, we've discovered 2 warning signs for El Puerto de Liverpool. de (1 can't be ignored!) that you should be aware of before investing here.
2. Future Earnings: How does LIVEPOL C-1'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. 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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