Current Price: ~ $54/share

Yield: ~ 1.33%

Through a global chain of almost 17,500 company-owned and licensed stores, Starbucks sells coffee, espresso, teas, cold blended beverages, complementary food items, and other accessories. In addition to its retail operations, the firm distributes packaged coffee, VIA single-serve packets, K-Cups, and tea through grocery stores and warehouse clubs under the Starbucks, Tazo, and the Seattle's Best Coffee brands.

Estimated WACC for the firm today is 9.41% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2003 | 209 |

2004 | 408 |

2005 | 280 |

2006 | 360 |

2007 | 251 |

2008 | 274 |

2009 | 943 |

2010 | 1264 |

2011 | 1081 |

2012 | 894 |

Average Annual Growth FCF: ~ 35%

CAGR FCF: ~ 17.5%

Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 18% per year

Internal Growth Rate: ~ 12%

Sustainable Growth Rate: ~ 22%

**Scenario 1**

Average FCF (2012, 2011, 2010) is $1080 million

- Start at $1080 million FCF
- Assume a 5-year growth rate in FCF of 18% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1080 |

1 | 1274 |

2 | 1504 |

3 | 1774 |

4 | 2094 |

5 | 2471 |

Terminal Value | 30977 |

The firm's future free cash flows, discounted at a WACC of 9.41%, give a present value for the entire firm (Debt + Equity) of $26570 million. If the firm's fair value of debt is estimated at $674 million, then the fair value of the firm's equity could be $25896 million. $25896 million / 744 million outstanding shares is approximately $35 per share and a 20% margin of safety is $28/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 18% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1080 |

1 | 1274 |

2 | 1504 |

3 | 1774 |

4 | 2094 |

5 | 2471 |

Terminal Value | 53874 |

- Present Value of the entire firm (Debt + Equity): $41173 million
- Value of Equity: $40499 million or $54/share
- 20% margin of safety is $43/share

Sources

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.