Microsoft Excel LibreOffice Calc

Starbucks Corp. (SBUX)


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

Difficulty: Intermediate

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

USD $ in thousands, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 8.01%
01 FCFF0 10,068,612 
1 FCFF1 11,980,170  = 10,068,612  × (1 + 18.99%) 11,091,958 
2 FCFF2 13,672,382  = 11,980,170  × (1 + 14.13%) 11,720,190 
3 FCFF3 14,939,114  = 13,672,382  × (1 + 9.26%) 11,856,611 
4 FCFF4 15,597,135  = 14,939,114  × (1 + 4.40%) 11,461,087 
5 FCFF5 15,526,086  = 15,597,135  × (1 + -0.46%) 10,563,022 
5 Terminal value (TV5) 182,617,642  = 15,526,086  × (1 + -0.46%) ÷ (8.01%-0.46%) 124,242,141 
Intrinsic value of Starbucks Corp.’s capital 180,935,009 
Less: Long-term debt, including current portion (fair value) 9,322,000 
Intrinsic value of Starbucks Corp.’s common stock 171,613,009 
Intrinsic value of Starbucks Corp.’s common stock (per share) $141.69
Current share price $90.08

Based on: 10-K (filing date: 2018-11-16).

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) 109,104,896  0.92 8.51%
Long-term debt, including current portion (fair value) 9,322,000  0.08 2.13% = 3.06% × (1 – 30.36%)

Based on: 10-K (filing date: 2018-11-16).

1 USD $ in thousands

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,211,200,000 × $90.08 = $109,104,896,000.00

   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
= (21.80% + 33.20% + 32.90% + 29.30% + 34.60% + 103.80%) ÷ 6 = 30.36%

WACC = 8.01%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Starbucks Corp., PRAT model

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Average Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
Selected Financial Data (USD $ in thousands)
Interest expense 170,300  92,500  81,300  70,500  64,100  28,100 
Net earnings attributable to Starbucks 4,518,300  2,884,700  2,817,700  2,757,400  2,068,100  8,300 
Effective income tax rate (EITR)1 21.80% 33.20% 32.90% 29.30% 34.60% 103.80%
Interest expense, after tax2 133,175  61,790  54,552  49,844  41,921  (1,068)
Add: Cash dividends declared 1,760,500  1,515,900  1,246,200  1,016,200  827,000  668,600 
Interest expense (after tax) and dividends 1,893,675  1,577,690  1,300,752  1,066,044  868,921  667,532 
EBIT(1 – EITR)3 4,651,475  2,946,490  2,872,252  2,807,244  2,110,021  7,232 
Current portion of long-term debt 349,900  —  400,000  —  —  — 
Long-term debt, excluding current portion 9,090,200  3,932,600  3,202,200  2,347,500  2,048,300  1,299,400 
Shareholders’ equity 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000  4,480,200 
Total capital 10,609,600  9,382,700  9,486,200  8,165,500  7,320,300  5,779,600 
Ratios
Retention rate (RR)4 0.59 0.46 0.55 0.62 0.59 -91.30
Return on invested capital (ROIC)5 43.84% 31.40% 30.28% 34.38% 28.82% 0.13%
Averages
RR 0.56
ROIC 33.75%
Growth rate of FCFF (g)6 18.99%

Based on: 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), 10-K (filing date: 2013-11-18).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 170,300 × (1 – 21.80%) = 133,175

3 EBIT(1 – EITR) = Net earnings attributable to Starbucks + Interest expense, after tax
= 4,518,300 + 133,175 = 4,651,475

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,651,4751,893,675] ÷ 4,651,475 = 0.59

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,651,475 ÷ 10,609,600 = 43.84%

6 g = RR × ROIC
= 0.56 × 33.75% = 18.99%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (118,426,896 × 8.01%10,068,612) ÷ (118,426,896 + 10,068,612) = -0.46%

where:
Total capital, fair value0 = current fair value of Starbucks Corp.’s debt and equity (USD $ in thousands)
FCFF0 = last year Starbucks Corp.’s free cash flow to the firm (USD $ 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 18.99%
2 g2 14.13%
3 g3 9.26%
4 g4 4.40%
5 and thereafter g5 -0.46%

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)
= 18.99% + (-0.46%18.99%) × (2 – 1) ÷ (5 – 1) = 14.13%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 18.99% + (-0.46%18.99%) × (3 – 1) ÷ (5 – 1) = 9.26%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 18.99% + (-0.46%18.99%) × (4 – 1) ÷ (5 – 1) = 4.40%