Are Investors Undervaluing Betterware de México, S.A.P.I. de C.V. (NASDAQ:BWMX) By 27%?

Key Insights

• Betterware de MéxicoP.I. de's estimated fair value is US$26.56 based on 2 Stage Free Cash Flow to Equity

• Betterware de MéxicoP.I. de's US$19.50 share price signals that it might be 27% undervalued

• Peers of Betterware de MéxicoP.I. de are currently trading on average at a 2,913% premium

Does the April share price for Betterware de México, S.A.P.I. de C.V. (NASDAQ:BWMX) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Betterware de MéxicoP.I. de

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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MX$, Millions)	Mex$600.0m	Mex$1.68b	Mex$1.69b	Mex$1.71b	Mex$1.74b	Mex$1.77b	Mex$1.80b	Mex$1.84b	Mex$1.88b	Mex$1.92b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 0.75%	Est @ 1.21%	Est @ 1.53%	Est @ 1.76%	Est @ 1.92%	Est @ 2.03%	Est @ 2.11%	Est @ 2.16%
Present Value (MX$, Millions) Discounted @ 11%	Mex$538	Mex$1.4k	Mex$1.2k	Mex$1.1k	Mex$1.0k	Mex$922	Mex$843	Mex$771	Mex$706	Mex$647

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$9.1b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = Mex$1.9b× (1 + 2.3%) ÷ (11%– 2.3%) = Mex$21b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$21b÷ ( 1 + 11%)¹⁰= Mex$7.2b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is Mex$16b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$19.5, the company appears a touch undervalued at a 27% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf

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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Betterware de MéxicoP.I. 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 11%, which is based on a levered beta of 1.245. 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 Betterware de MéxicoP.I. de

Strength

• Earnings growth over the past year exceeded the industry.

• Debt is well covered by earnings and cashflows.

• Dividends are covered by earnings and cash flows.

Weakness

• Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market.

Opportunity

• Annual earnings are forecast to grow faster than the American market.

• Good value based on P/E ratio and estimated fair value.

Threat

• No apparent threats visible for BWMX.

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Betterware de MéxicoP.I. de, we've compiled three relevant elements you should assess:

1. Risks: Take risks, for example - Betterware de MéxicoP.I. de has 2 warning signs we think you should be aware of.

2. Future Earnings: How does BWMX'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American 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.