Estimating The Fair Value Of Grupo Comercial Chedraui, S.A.B. de C.V. (BMV:CHDRAUIB)

Key Insights

• The projected fair value for Grupo Comercial Chedraui. de is Mex$136 based on 2 Stage Free Cash Flow to Equity
• Grupo Comercial Chedraui. de's Mex$125 share price indicates it is trading at similar levels as its fair value estimate
• Analyst price target for CHDRAUI B is Mex$160, which is 18% above our fair value estimate

Does the December share price for Grupo Comercial Chedraui, S.A.B. de C.V. (BMV:CHDRAUIB) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

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Step By Step Through 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.

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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (MX$, Millions)	Mex$9.52b	Mex$11.0b	Mex$9.60b	Mex$11.5b	Mex$12.1b	Mex$12.9b	Mex$13.9b	Mex$14.9b	Mex$16.1b	Mex$17.4b
Growth Rate Estimate Source	Analyst x3	Analyst x3	Analyst x2	Analyst x1	Est @ 5.64%	Est @ 6.55%	Est @ 7.18%	Est @ 7.62%	Est @ 7.93%	Est @ 8.14%
Present Value (MX$, Millions) Discounted @ 15%	Mex$8.3k	Mex$8.3k	Mex$6.3k	Mex$6.5k	Mex$6.0k	Mex$5.5k	Mex$5.2k	Mex$4.8k	Mex$4.5k	Mex$4.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$60b

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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 8.6%. We discount the terminal cash flows to today's value at a cost of equity of 15%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = Mex$17b× (1 + 8.6%) ÷ (15%– 8.6%) = Mex$290b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$290b÷ ( 1 + 15%)¹⁰= Mex$71b

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$130b. 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$125, the company appears about fair value at a 7.5% 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.

Important 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 Grupo Comercial Chedraui. 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 0.929. 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.

See our latest analysis for Grupo Comercial Chedraui. de

SWOT Analysis for Grupo Comercial Chedraui. de

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. 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. For Grupo Comercial Chedraui. de, we've compiled three pertinent aspects you should consider:

1. Financial Health: Does CHDRAUI B have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does CHDRAUI B'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. 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.