As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently on our screens, Costco Wholesale Corp (COST).
ProfileCostco operates a membership-based, no-frills retail model, predicated on offering a select product assortment in bulk quantities at bargain prices. The firm avoids maintaining costly product displays by keeping inventory on pallets and limits distribution expenses by storing its inventory at the point of sale in the warehouse. Given Costco’s frugal cost structure, the firm is able to price its merchandise below competing retailers, driving high sales volume per warehouse and allowing the retailer to generate strong profits on thin margins. Costco operates over 600 warehouses in the United States and boasts over 60% market share in the domestic warehouse club industry. Internationally, Costco operates another 280 warehouses, primarily in markets such as Canada, Mexico, Japan, and the UK.
Recent PerformanceOver the past twelve months the share price is up 36.42%.
Source: Google FinanceInputs
Forecasted Free Cash Flows (FCFs)
Terminal ValueTerminal Value = FCF * (1 + g) / (r – g) = 237.93 billionPresent Value of Terminal ValuePV of Terminal Value = Terminal Value / (1 + WACC)^5 = 161.93 billionPresent Value of Free Cash FlowsPresent Value of FCFs = ∑ (FCF / (1 + r)^n) = 37.05 billionEnterprise ValueEnterprise Value = Present Value of FCFs + Present Value of Terminal Value = 198.98 billionNet DebtNet Debt = Total Debt – Total Cash = -2.87 billionEquity ValueEquity Value = Enterprise Value – Net Debt = 201.85 billionPer-Share DCF ValuePer-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $455.65
Conclusion
Based on the DCF valuation, the stock is overvalued. The DCF value of $455.65 per share is lower than the current market price of $944.7. The Margin of Safety is -107.33%.More By This Author:ORCL: One Stock That Superinvestors Are Dumping – Is It Time To Sell?
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