Grupo Traxión, S.A.B. de C.V. (BMV:TRAXIONA) Shares Could Be 30% Below Their Intrinsic Value Estimate

Key Insights

• Grupo Traxión. de's estimated fair value is Mex$41.85 based on 2 Stage Free Cash Flow to Equity
• Grupo Traxión. de's Mex$29.18 share price signals that it might be 30% undervalued
• Analyst price target for TRAXION A is Mex$45.35, which is 8.4% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Grupo Traxión, S.A.B. de C.V. (BMV:TRAXIONA) by estimating the company's 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. There's really not all that much to it, even though it might appear quite complex.

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 Grupo Traxión. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MX$, Millions)	Mex$1.31b	Mex$1.68b	Mex$2.05b	Mex$2.48b	Mex$2.84b	Mex$3.19b	Mex$3.54b	Mex$3.90b	Mex$4.26b	Mex$4.63b
Growth Rate Estimate Source	Analyst x3	Analyst x3	Analyst x3	Analyst x3	Est @ 14.55%	Est @ 12.47%	Est @ 11.01%	Est @ 9.99%	Est @ 9.28%	Est @ 8.78%
Present Value (MX$, Millions) Discounted @ 18%	Mex$1.1k	Mex$1.2k	Mex$1.3k	Mex$1.3k	Mex$1.3k	Mex$1.2k	Mex$1.1k	Mex$1.1k	Mex$991	Mex$917

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$11b

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 18%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = Mex$4.6b× (1 + 7.6%) ÷ (18%– 7.6%) = Mex$50b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$50b÷ ( 1 + 18%)¹⁰= Mex$9.9b

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$21b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of Mex$29.2, the company appears quite good value at a 30% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Grupo Traxión. 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 18%, which is based on a levered beta of 1.263. 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 Grupo Traxión. de

Next Steps:

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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Grupo Traxión. de, there are three relevant aspects you should look at:

1. Risks: We feel that you should assess the 4 warning signs for Grupo Traxión. de (1 doesn't sit too well with us!) we've flagged before making an investment in the company.
2. Future Earnings: How does TRAXION A'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. 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.