Projected Yield: ~ 1.32%
Through a global chain of more than 16,600 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 coffee and tea through grocery stores and warehouse clubs under the Tazo, Seattle's Best Coffee, and Torrefazione Italia brands. Starbucks also markets bottled beverages, ice creams, and liqueurs through various partnerships.
I estimated the firm's WACC today at 14.60% 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 | 77 |
| 2002 | 102 |
| 2003 | 209 |
| 2004 | 408 |
| 2005 | 280 |
| 2006 | 360 |
| 2007 | 251 |
| 2008 | 274 |
| 2009 | 943 |
| 2010 | 1264 |
| TTM | 921 |
Average Annual Growth FCF: ~ 54%
CAGR FCF: ~ 36%
Consensus Forecast Industry 5-Year Growth: ~ 15% per yearConsensus Forecast Company 5-Year Growth: ~ 18% per year
Scenario 1
Starting at $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 | 23371 |
The firm's future cash flows, discounted at a WACC of 14.60%, give a present value for the entire firm (Debt + Equity) of $18,729 million. If the firm's fair value of debt is estimated at $620 million, then the fair value of the firm's equity could be $18,109 million. $18,109 million / 750 million outstanding shares is approximately $24 per share and a 20% margin of safety is $19/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 7% per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 1264 |
| 1 | 1492 |
| 2 | 1760 |
| 3 | 2077 |
| 4 | 2451 |
| 5 | 2892 |
| Terminal Value | 44897 |
The firm's future cash flows, discounted at a WACC of 14.60%, give a present value for the entire firm (Debt + Equity) of $29,619 million. If the firm's fair value of debt is estimated at $620 million, then the fair value of the firm's equity could be $28,999 million. $28,999 million / 750 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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