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Gap Inc: fairly valued at $23/share

|Includes: The Gap, Inc. (GPS)
I believe Gap Inc. ($GPS), at approximately $23/share is fairly valued on a cash flow valuation basis.  Assuming all else at $GPS meets my standard for good business, I'd buy it today for the long term at $18.
Gap is a specialty retailer that sells casual apparel for men, women, and children under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. The company operates more than 3,000 corporate-owned stores throughout the United States, Canada, Western Europe, and Japan as well as 151 franchise stores in the Middle East, Southeast Asia, Eastern Europe, and other parts of the world.
I estimated the firm's WACC at 14.11% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year FCF $Millions
2001 -567
2002 378
2003 935
2004 1899
2005 1178
2006 951
2007 678
2008 1399
2009 981
2010 1594
TTM 1186
Average Annual Growth ex-2001: approx. 38%
CAGR ex-2001: approx. 20%
Consensus Forecast Industry 5-Year Growth: approx. 16% per year
Consensus Forecast Company 5-Year Growth: approx. 11% per year
Assuming the company achieves a 5-year growth rate in FCF of 11% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
Year FCF $ Millions
0 1186
1 1316
2 1461
3 1622
4 1800
5 1998
Terminal Value 15722
The firm's future cash flows, discounted at a WACC of 14.11%, give a present value for the entire firm (Debt + Equity) of $13,588 million. If the firm's fair value of debt is estimated at $0 million (no debt), then the fair value of the firm's equity could be $13,588 million.  $13,588 million / 614 million outstanding shares is approximately $22 per share and a 20% margin of safety is $18. Assuming all else at $GPS meets my standard for good business, I'd buy it today for the long term at $18.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.