Shares of Kimberly-Clark de México, SAB de CV (BMV:KIMBERA) could be 25% below their estimated intrinsic value

Key findings

Today we’ll run through a simple valuation method to help us assess the attractiveness of Kimberly-Clark de México, SAB de CV (BMV:KIMBERA) as an investment opportunity. To do this, we’ll take the expected future cash flows and discount them to today’s value. We’ll use the Discounted Cash Flow (DCF) model on this occasion. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Kimberly-Clark de México SAB de C. V

The method

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower growth. First, we need to get estimates for 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 that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, the sum of these future cash flows is discounted to today’s value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 59 billion Mex$

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 7.8%. We discount the terminal cash flows to today’s value at a cost of equity of 14%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = Mex$15 billion × (1 + 7.8%) ÷ (14% – 7.8%) = Mex$267 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 267 billion Mex$ ÷ (1 + 14%)¹⁰= 74 billion Mex$

The total value or equity value is then the sum of the present value of future cash flows, which in this case is 133 billion Mex dollars. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of 32.5 Mex dollars, the company appears somewhat undervalued at a 25% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it is better to consider this as a rough estimate that is not accurate to the last cent.

The assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Kimberly-Clark de México SAB de C. V 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 takes debt into account. In this calculation, we used 14%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Kimberly-Clark de México SAB de C. V

Next Steps:

Valuation is only one side of the coin in developing your investment thesis and just one of many factors you need to evaluate for a company. It is not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, slightly adjusting the terminal value growth rate can dramatically change the overall result. Can we find out why the company is trading at a discount to intrinsic value? For Kimberly-Clark de México SAB de C. V, there are three basic aspects you should consider:

1. Risks: Please note that Kimberly-Clark de México SAB de C. V 2 warning signals in our investment analysis you should know about…
2. Future income: How does KIMBER A’s growth rate compare to its competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for each Mexican stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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