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Costco Wholesale Corp: Cash Flow Valuation Update

|Includes:Costco Wholesale Corporation (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

(click to enlarge)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
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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
Click to enlarge
  • 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

Sources

Morningstar.com

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