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:

Year | FCF $Millions |

2002 | -20 |

2003 | 697 |

2004 | 1393 |

2005 | 788 |

2006 | 615 |

2007 | 691 |

2008 | 578 |

2009 | 842 |

2010 | 1725 |

2011 | 1908 |

TTM | 1815 |

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

Year | FCF $Millions |

0 | 1492 |

1 | 1686 |

2 | 1905 |

3 | 2153 |

4 | 2433 |

5 | 2749 |

Terminal Value | 45919 |

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

Year | FCF $Millions |

0 | 1725 |

1 | 1949 |

2 | 2203 |

3 | 2489 |

4 | 2813 |

5 | 3178 |

Terminal Value | 53090 |

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

**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.