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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: Cash Flow Valuation 0 comments
    Feb 6, 2012 8:08 PM | about stocks: COST
    Current Price: ~ $85/share
    Projected Yield: ~ 1.13%

    Costco Wholesale is the third-largest retailer in the U.S. and the ninth-largest retailer in the world. The firm operates more than 430 warehouse clubs in the U.S. and Puerto Rico (73% of revenue), 80 in Canada (16%), and 80 in other countries (11%), with an average size of about 140,000 square feet.

    Estimated WACC for the firm today is 6.76% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2002-20
    2003697
    20041393
    2005788
    2006615
    2007691
    2008578
    2009842
    20101725
    20111908
    TTM1815

    Average Annual Growth FCF ex-2002: ~ 24%

    CAGR FCF ex-2002: ~ 13%
    Consensus Forecast Industry 5-Year Growth: ~ 14% per year

    Consensus Forecast Company 5-Year Growth: ~ 13% per year

    Internal Growth Rate: ~ 4%

    Sustainable Growth Rate: ~ 10%

    Scenario 1

    Average FCF (2011, 2010, 2009) is $1492 million. Starting at $1492 million FCF, assume the company achieves a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01492
    11686
    21905
    32153
    42433
    52749
    Terminal Value45919

    The firm's future cash flows, discounted at a WACC of 6.76%, give a present value for the entire firm (Debt + Equity) of $41976 million. If the firm's fair value of debt is estimated at $2514 million, then the fair value of the firm's equity could be $39462 million. $39462 million / 435 million outstanding shares is approximately $91 per share and a 20% margin of safety is $73/share.

    Scenario 2

    All else being equal, start at $1725 million FCF, assume the company achieves a 5-year growth rate in FCF of 13% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01725
    11949
    22203
    32489
    42813
    53178
    Terminal Value53090

    The firm's future cash flows, discounted at a WACC of 6.76%, give a present value for the entire firm (Debt + Equity) of $48531 million. If the firm's fair value of debt is estimated at $2514 million, then the fair value of the firm's equity could be $46017 million. $46017 million / 435 million outstanding shares is approximately $106 per share and a 20% margin of safety is $85/share.

    Sources

    Morningstar.com

    Yahoo! Finance

    Costco Wholesale Investor Relations

    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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