Current Price: ~ $85/share
Projected Yield: ~ 1.13%
Costco Wholesale is the thirdlargest retailer in the U.S. and the ninthlargest 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 ex2002: ~ 24%
CAGR FCF ex2002: ~ 13%
Consensus Forecast Industry 5Year Growth: ~ 14% per year
Consensus Forecast Company 5Year 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 5year 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 5year 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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