Monday, February 6, 2012

Costco Wholesale: $COST Cash Flow Valuation


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
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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