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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Starbucks Corporation: Cash Flow Valuation Update 0 comments
    Dec 20, 2012 2:59 PM | about stocks: SBUX

    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:

    YearFCF $Millions
    2003209
    2004408
    2005280
    2006360
    2007251
    2008274
    2009943
    20101264
    20111081
    2012894

    (click to enlarge)

    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

    YearFCF $Millions
    01080
    11274
    21504
    31774
    42094
    52471
    Terminal Value30977

    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

    YearFCF $Millions
    01080
    11274
    21504
    31774
    42094
    52471
    Terminal Value53874
    • 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

    Morningstar.com

    Yahoo! Finance

    Starbucks.com

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

    Stocks: SBUX
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