Is GMéxico Transportes, SAB de CV (BMV:GMXT) worth Mex$35.8 based on its intrinsic value?
What is the distance between GMéxico Transportes, SAB de CV (BMV:GMXT) and its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking the expected future cash flows and discounting them to the present value. This will be done using the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
Check out our latest review for GMéxico Transportes. of
What is the estimated valuation?
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
Estimated free cash flow (FCF) over 10 years
|Leveraged FCF (MX$, Millions)||Mexico$12.4 billion||12.5 billion Mexican dollars||Mexico$9.67 billion||Mexico$9.40 billion||Mexico$9.43 billion||Mexico$9.64 billion||10.0 billion Mexican dollars||10.5 billion Mexican dollars||11.1 billion Mexican dollars||11.7 billion Mexican dollars|
|Growth rate estimate Source||Analyst X2||Analyst X2||Analyst X1||Is @ -2.72%||Is at 0.24%||Is @ 2.3 %||Is at 3.75%||Is at 4.77%||Is at 5.47%||Is at 5.97%|
|Present value (MX$, millions) discounted at 13%||Mexico$10.9k||Mex $ 9.8K||Mexico$6.6k||Mex $ 5.0k||Mex $ 4.2k||Mex $ 3.8K||Mexico$3.6k|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 58 billion Mexican dollars
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (7.1%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 13%.
Terminal value (TV)2031 × (1 + g) ÷ (r – g) = 12 billion Mexican dollars × (1 + 7.1%) ÷ (13%–7.1%) = 202 billion Mexican dollars
Present value of terminal value (PVTV)= TV / (1 + r)ten= 202 billion Mexican dollars÷ ( 1 + 13%)ten= 58 billion Mexican dollars
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 115 billion Mexican pesos. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of Mex$35.8, the company appears slightly overvalued at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we are looking at GMéxico Transportes. 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 factors in debt. In this calculation, we used 13%, which is based on a leveraged beta of 1.069. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the only piece of analysis you look at for a company. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. What is the reason why the stock price exceeds the intrinsic value? For GMexico Transportes. de, there are three relevant aspects you should consider:
- Risks: You should be aware of the 1 warning sign for GMéxico Transportes. of we found out before considering an investment in the business.
- Future earnings: How does GMXT*’s growth rate compare to its peers and the broader market? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the BMV every day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.