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.
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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