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Starbucks Corporation: cash flow valuation update

|Includes: Starbucks Corporation (SBUX)
Current Price: ~ $46/share
Projected Yield: ~ 1.50%

Through a global chain of more than 17,000 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, Seattle's Best Coffee, and Torrefazione Italia brands. 



I estimated the firm's WACC today at 11.99% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2002
102
2003
209
2004
408
2005
280
2006
360
2007
251
2008
274
2009
943
2010
1264
2011
1081

Average Annual Growth FCF: ~ 49%
CAGR FCF: ~ 30%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 18% per year

Scenario 1
Starting at a decade-high $1264 million FCF, assuming the company achieves a 5-year growth rate in FCF of 18% 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
1264
1
1492
2
1760
3
2077
4
2451
5
2892
Terminal Value
28456

The firm's future cash flows, discounted at a WACC of 11.99%, give a present value for the entire firm (Debt + Equity) of $23566 million. If the firm's fair value of debt is estimated at $600 million, then the fair value of the firm's equity could be $22966 million.  $22966 million / 745 million outstanding shares is approximately $31 per share and a 20% margin of safety is $25/share.


Scenario 2
Starting at $1264 million FCF, assuming the company achieves a 5-year growth rate in FCF of 18% per year, and then a growth rate in FCF of 5% per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1264
1
1492
2
1760
3
2077
4
2451
5
2892
Terminal Value
48807

The firm's future cash flows, discounted at a WACC of 11.99%, give a present value for the entire firm (Debt + Equity) of $35119 million. If the firm's fair value of debt is estimated at $600 million, then the fair value of the firm's equity could be $34519 million.  $34519 million / 745 million outstanding shares is approximately $46 per share and a 20% margin of safety is $37/share.


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