Operadora de Sites Mexicanos, S.A.B. de C.V. (BMV:SITES1A-1) Shares Could Be 33% Below Their Intrinsic Value Estimate

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Operadora de Sites Mexicanos. de fair value estimate is Mex$24.74
• Operadora de Sites Mexicanos. de is estimated to be 33% undervalued based on current share price of Mex$16.49
• The average premium for Operadora de Sites Mexicanos. de's competitorsis currently 40%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Operadora de Sites Mexicanos, S.A.B. de C.V. (BMV:SITES1A-1) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Operadora de Sites Mexicanos. de

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. 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.

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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MX$, Millions)	Mex$5.87b	Mex$6.63b	Mex$6.36b	Mex$6.34b	Mex$6.47b	Mex$6.72b	Mex$7.05b	Mex$7.46b	Mex$7.94b	Mex$8.49b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ -0.34%	Est @ 2.09%	Est @ 3.80%	Est @ 4.99%	Est @ 5.83%	Est @ 6.41%	Est @ 6.82%
Present Value (MX$, Millions) Discounted @ 14%	Mex$5.2k	Mex$5.1k	Mex$4.3k	Mex$3.8k	Mex$3.4k	Mex$3.1k	Mex$2.9k	Mex$2.7k	Mex$2.5k	Mex$2.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$35b

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 (7.8%) 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 14%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = Mex$8.5b× (1 + 7.8%) ÷ (14%– 7.8%) = Mex$155b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$155b÷ ( 1 + 14%)¹⁰= Mex$43b

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$78b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of Mex$16.5, the company appears quite undervalued at a 33% 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.

The Assumptions

We would point out that 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 Operadora de Sites Mexicanos. 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 14%, which is based on a levered beta of 0.800. 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 Operadora de Sites Mexicanos. de

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. Can we work out why the company is trading at a discount to intrinsic value? For Operadora de Sites Mexicanos. de, there are three essential items you should further research:

1. Risks: For example, we've discovered 1 warning sign for Operadora de Sites Mexicanos. de that you should be aware of before investing here.
2. Future Earnings: How does SITES1 A-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. 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.

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