Business Overview

Key Metrics

Total: 2/17

• +1 Projected Operating Margin: 12.43%
• +0 Projected 5-Year Revenue CAGR: 0.84%
• +1 Last 5-Year ROIC: 10.02%
• +1 Estimated Cost of Capital: 6.92% (less than ROIC)
• +0 Last 5-Year Shares Outstanding CAGR: +0.00%
• -1 Projected 5-Year EPS CAGR: 2.00% (below ~10% represents a negative given the “easiness” of manipulation by the companies of these values)
• +0 Projected 5-Year Dividend CAGR: 4.66%
• +2 Estimated Debt Rating: Aaa
• -2 Morningstar Moat: None
• +0 Morningstar Uncertainty: Medium

 Founded in 1870, Corticeira Amorim is the biggest producer of cork in the world, and to be honest, a pride for me as a portuguese investor. In my opinion, it is the most fascinating and the portuguese company with the widest moat within a very challenging environment. This is shown in its projected operating margin, above the ~10% mark, showing it has some competitive advantages. Also, its 5 year ROIC is above its estimated cost of capital, showing that its management is allocating well the capital of its shareholders. Also, its interest coverage ratio gives us a stellar estimated debt rating.

Despite my confidence and all the good things enunciated above, there’s some challenges this company faces. One of them, perhaps the most critical, is the worldwide decline in wine consumption, namely by the younger generations. Given the fact that the company makes most of its revenue from cork stoppers it will impact the company for sure. How much, only time will tell. However, this impacts the projected revenue growth for the next couple of years, showing almost no growth for both revenue and EPS around ~1-2%, below economy growth rate.

Let’s check if its current valuation is justified at its current market price.

Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/S – we assume mean reversion to the historical P/S values;
• Historical P/B – we assume mean reversion to the historical P/B values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;
• Historical P/E – we assume mean reversion to the historical P/E values.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year German bonds as the risk free rate (used the most default-free country that uses the same currency – the euro) and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s does not provide a rating for the company I estimated it by passing the Operating Income (EBIT) that will be used internally to calculate an interest coverage ratio that is then compared to similar rated companies.

Cost of Capital: 6.92%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 40%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of Germany), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Initial and Terminal Cost of Capital – I’m assuming the same value for both, given the estimated value previously;
• Initial and Terminal Tax Rate – I’m using a value for both near the historical average of ~17-18%.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 8.93 euros for Corticeira Amorim.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Corticeira Amorim seems to be undervalued given that its current price of 7.00 euros is well below P10. From these simulations we can extrapolate that there’s more than 90% probability of Corticeira Amorim being undervalued.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 35%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 15 PE for the company.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Using this valuation method, Corticeira Amorim that is currently priced at 7.00 euros seems to be overvalued being currently priced well above P90. From this we can extrapolate that there’s more than ~90% probability of the stock being overvalued.

This seems to be the contrary of what we’ve seen on the DCF. Let’s check a historical valuation next.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

Historical P/S (Weight: 10%)

The current P/S (Price / Sales) ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 1.61 we can assume a fair value of 9.43 euros.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

Historical P/B (Weight: 10%)

The current P/B (Price / Book) ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 2.43 we can assume a fair value of 10.37 euros.

Historical EV/EBITDA (Weight: 5%)

The current EV/EBITDA ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 10.47 we can assume a fair value of 9.09 euros.

Historical P/E (Weight: 5%)

The current P/E ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 17.32 we can assume a fair value of 8.42 euros.

Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I’ll probably start buying around 6.71 euros, giving it a little higher margin of safety given the current uncertainty around the future of the company.

As always, remember that the fair value estimate has a 100% probability of being wrong and it will never be a precise number, even if it has decimals next to it

Overall it seems Corticeira Amorim is fairly valued or even a little undervalued at the current prices.

Fair Value: 7.91 euros