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Starbucks Corp. (NASDAQ:SBUX)


Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

Starbucks Corp., free cash flow to the firm (FCFF) forecast

US$ in thousands, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 6.70%
01 FCFF0 3,481,498 
1 FCFF1 4,123,415  = 3,481,498  × (1 + 18.44%) 3,864,443 
2 FCFF2 4,728,351  = 4,123,415  × (1 + 14.67%) 4,153,072 
3 FCFF3 5,243,908  = 4,728,351  × (1 + 10.90%) 4,316,629 
4 FCFF4 5,618,130  = 5,243,908  × (1 + 7.14%) 4,334,223 
5 FCFF5 5,807,411  = 5,618,130  × (1 + 3.37%) 4,198,865 
5 Terminal value (TV5) 180,147,740  = 5,807,411  × (1 + 3.37%) ÷ (6.70%3.37%) 130,250,119 
Intrinsic value of Starbucks Corp.’s capital 151,117,350 
Less: Long-term debt, including current portion (fair value) 12,033,000 
Intrinsic value of Starbucks Corp.’s common stock 139,084,350 
 
Intrinsic value of Starbucks Corp.’s common stock (per share) $119.05
Current share price $82.14

Based on: 10-K (filing date: 2019-11-15).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Weighted Average Cost of Capital (WACC)

Starbucks Corp., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 95,964,162  0.89 7.24%
Long-term debt, including current portion (fair value) 12,033,000  0.11 2.39% = 3.33% × (1 – 28.08%)

Based on: 10-K (filing date: 2019-11-15).

1 US$ in thousands

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,168,300,000 × $82.14 = $95,964,162,000.00

   Long-term debt, including current portion (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (19.50% + 19.00% + 33.20% + 32.90% + 29.30% + 34.60%) ÷ 6 = 28.08%

WACC = 6.70%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Starbucks Corp., PRAT model

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Average Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
Selected Financial Data (US$ in thousands)
Interest expense 331,000  170,300  92,500  81,300  70,500  64,100 
Net earnings attributable to Starbucks 3,599,200  4,518,300  2,884,700  2,817,700  2,757,400  2,068,100 
 
Effective income tax rate (EITR)1 19.50% 19.00% 33.20% 32.90% 29.30% 34.60%
 
Interest expense, after tax2 266,455  137,943  61,790  54,552  49,844  41,921 
Add: Cash dividends declared 1,801,600  1,760,500  1,515,900  1,246,200  1,016,200  827,000 
Interest expense (after tax) and dividends 2,068,055  1,898,443  1,577,690  1,300,752  1,066,044  868,921 
 
EBIT(1 – EITR)3 3,865,655  4,656,243  2,946,490  2,872,252  2,807,244  2,110,021 
 
Current portion of long-term debt —  349,900  —  400,000  —  — 
Long-term debt, excluding current portion 11,167,000  9,090,200  3,932,600  3,202,200  2,347,500  2,048,300 
Shareholders’ equity (deficit) (6,232,200) 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000 
Total capital 4,934,800  10,609,600  9,382,700  9,486,200  8,165,500  7,320,300 
Financial Ratios
Retention rate (RR)4 0.47 0.59 0.46 0.55 0.62 0.59
Return on invested capital (ROIC)5 78.33% 43.89% 31.40% 30.28% 34.38% 28.82%
Averages
RR 0.55
ROIC 33.75%
 
FCFF growth rate (g)6 18.44%

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

1 See details »

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 331,000 × (1 – 19.50%) = 266,455

3 EBIT(1 – EITR) = Net earnings attributable to Starbucks + Interest expense, after tax
= 3,599,200 + 266,455 = 3,865,655

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,865,6552,068,055] ÷ 3,865,655 = 0.47

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,865,655 ÷ 4,934,800 = 78.33%

6 g = RR × ROIC
= 0.55 × 33.75% = 18.44%


FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (107,997,162 × 6.70%3,481,498) ÷ (107,997,162 + 3,481,498) = 3.37%

where:
Total capital, fair value0 = current fair value of Starbucks Corp.’s debt and equity (US$ in thousands)
FCFF0 = the last year Starbucks Corp.’s free cash flow to the firm (US$ in thousands)
WACC = weighted average cost of Starbucks Corp.’s capital


FCFF growth rate (g) forecast

Starbucks Corp., H-model

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Year Value gt
1 g1 18.44%
2 g2 14.67%
3 g3 10.90%
4 g4 7.14%
5 and thereafter g5 3.37%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 18.44% + (3.37%18.44%) × (2 – 1) ÷ (5 – 1) = 14.67%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 18.44% + (3.37%18.44%) × (3 – 1) ÷ (5 – 1) = 10.90%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 18.44% + (3.37%18.44%) × (4 – 1) ÷ (5 – 1) = 7.14%