Today we’re going to take a simple walkthrough of a valuation method used to estimate the attractiveness of Grupo Televisa, SAB (BMV:TLEVISACPO) as an investment opportunity by taking expected future cash flows and discounting them to their current value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St Analysis Template.
Check out our latest analysis for Grupo Televisa
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.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
|Leveraged FCF (MX$, Millions)||Mexico$7.27 billion||Mex$7.01b||Mexico$8.22b||Mexico$6.98 billion||Mexico$6.39 billion||Mexico$6.15 billion||Mexico$6.13 billion||Mexico$6.24 billion||Mexico$6.46 billion||Mexico$6.76 billion|
|Growth rate estimate Source||Analyst x4||Analyst x4||Analyst x4||Analyst x2||Is @ -8.39%||Is @ -3.7%||Is @ -0.42%||Is at 1.88%||Is at 3.49%||Is at 4.61%|
|Present value (MX$, millions) discounted at 14%||Mexico$6.4k||Mexico$5.4k||Mex$5.5k||Mex$4.1k||Mex$3.3k||Mexico$2.7k||Mexico$2.4k||Mexico$2.1k||Mex$1.9k||Mex$1.8k|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = 35 billion Mexican dollars
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond 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 (7.2%) 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 14%.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = 6.8 billion Mexican dollars × (1 + 7.2%) ÷ (14%–7.2%) = 101 billion Mexican dollars
Present value of terminal value (PVTV)= TV / (1 + r)ten= 101 billion Mexican dollars÷ ( 1 + 14%)ten= 26 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 62 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$25.3, the company appears around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another 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. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Grupo Televisa 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 1.236. 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.
Let’s move on :
Although a business valuation is important, it is only one of many factors you need to assess for a business. DCF models are not the be-all and end-all of investment valuation. 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. For Grupo Televisa, there are three other elements to consider:
- Financial health: Does TLEVISA CPO have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
- Future earnings: How does TLEVISA CPO’s growth rate compare to its peers and the market in general? 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. Simply Wall St updates its DCF calculation for every Mexican stock daily, so if you want to find the intrinsic value of any other stock, just 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.
Calculation of discounted cash flows for each share
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