Future Value

Future Value (FV) (Last edited: April, 2006)

The FV valuation technique is used so we find a target price five years out, and the minimum price we need to get to that price with our wanted growth rate. First we need Starbucks' EPS for the last 12 months: 0.65. You find this by simply going to Yahoo! Finance and entering in the company's ticker symbol.

So we have the EPS, now we need the growth rate. When you're at the company summary on Yahoo!, scroll down and look at all the options at the left. Click on Analyst Estimates and scroll down to "Growth Estimates" to see what growth rate analysts are expecting from Starbucks. We need the expectations for annual growth five years out, which is 22%.

The P/E is the next number we must have to perform the calculation. On the page that we started on you will find the current P/E ratio of 59.78. But this isn't the only P/E we need. You see, the FV technique relies on the P/E for the final output, so it is good to have 4-5 different ratios to use. On your Yahoo! Finance page scroll down to Key Statistics and you will find the foward P/E (For Oct. 2, 2007) that analysts expect. Why do we need to find other ratios? Well, as I said before, the P/E is a huge part of this valuation technique, so it is good to have several inputs (And thus, more outputs). With Starbucks this is even more important, because the current P/E is very high compared to what it's been in the past. To find past P/E ratios, go to MSN Money, tap in the ticker symbol, scroll down, and on the left you will see a link Financial Results. Go to "Key Ratios" and click on "10-Year Summary." There you can see past P/E ratios and compare them to today's.

Now we get to the calculation. An easy way to do this is simply enter it into Google, or you can use this calculator. Okay, so we start with the EPS and multiply it to the growth rate to the fifth power:

.65 * (1.22^5)

To get the fifth power on your calculator, enter in the expected annual growth (1.22), click x^y once, click 5, then hit x^y again. Just to get the growth rate clear, 1.05 is 5%, 1.33 is 33% etc. Rounded up we get 1.76. We multiply this number by the P/E (59.87) to get the FV: 105.37. So, the calculation looks like this:

.65 * (1.22^5) * 59.87 = 105.37

But this isn't everything, we must use a discount rate to get the Present Value. The Discount Rate is the amount of annual growth you expect from your investment, let's use 17% for Starbucks. To find the Present Value, simply do this:

105.37 / (1.17^5) = 48.06

Remember to put the Discount Rate to the fifth power. So you divide the end FV number by the Discount Rate to the fifth power. The complete calculation:

.65 * (1.22^5) * 59.87 = 105.37 (Future Value / (1.17^5) = 48.06 (Present Value)

But, we need to use other P/E ratios, because you never know when the P/E will get hit. Also play around with growth rates, have a low rate and a high rate. Try it with different P/E ratios as well. It is a fun technique for finding a target price five years out.

Take this with you, the FV technique:

EPS * (Growth Rate ^5) * P/E = Future Value / (Discount Rate ^5) = Present Value

Future Value / Present Value Calculator