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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Costco Wholesale Corp: Cash Flow Valuation Update 0 comments
    Dec 1, 2012 2:20 AM | about stocks: COST

    Current Price: ~ $104/share
    Yield: ~ 1.02%

    As of August, Costco Wholesale Corporation operates 439 membership warehouse clubs in the United States, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, nine in Taiwan, eight in Korea and three in Australia. The base and executive membership cost $55 and $110 per year, respectively. The company sells food, fuel, and general merchandise to its members but derives most of its profits from membership fees.

    Estimated WACC for the firm today is 5.96% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year FCF $Millions
    2003 697
    2004 1393
    2005 788
    2006 615
    2007 691
    2008 578
    2009 842
    2010 1725
    2011 1908
    2012 1577

    (click to enlarge)

    Average Annual Growth FCF: ~ 19%

    CAGR FCF: ~ 9.5%
    Consensus Forecast Industry 5-Year Growth: ~ 12% per year

    Consensus Forecast Company 5-Year Growth: ~ 12% per year

    Internal Growth Rate: ~ 5%

    Sustainable Growth Rate: ~ 11.5%

    Scenario 1
    The company generated $1577 million FCF in 2012

    • Start at $1577 million FCF
    • Assume a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 1577
    1 1766
    2 1978
    3 2216
    4 2481
    5 2779
    Terminal Value 52241

    The firm's future free cash flows, discounted at a WACC of 5.96%, give a present value for the entire firm (Debt + Equity) of $48455 million. If the firm's fair value of debt is estimated at $5163 million, then the fair value of the firm's equity could be $43292 million. $43292 million / 432 million outstanding shares is approximately $100 per share and a 20% margin of safety is $80/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 9.50% per year, then 2% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 1577
    1 1727
    2 1891
    3 2070
    4 2267
    5 2483
    Terminal Value 68674
    • Present Value of the entire firm (Debt + Equity): $60130 million
    • Value of Equity: $54967 million or $127/share
    • 20% margin of safety is $102/share


    Yahoo! Finance

    Costco Wholesale

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

    Stocks: COST
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