Costco Wholesale Corp: $COST Cash Flow Valuation Update

Current Price: ~ $104/share
Yield: ~ 1.02%


As of August, Costco Wholesale Corporation operates 439 membership warehouse clubs in the United States, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, nine in Taiwan, eight in Korea and three in Australia. The base and executive membership cost $55 and $110 per year, respectively. The company sells food, fuel, and general merchandise to its members but derives most of its profits from membership fees.

Estimated WACC for the firm today is 5.96% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2003	697
2004	1393
2005	788
2006	615
2007	691
2008	578
2009	842
2010	1725
2011	1908
2012	1577

Average Annual Growth FCF: ~ 19%

CAGR FCF: ~ 9.5%

Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 12% per year

Internal Growth Rate: ~ 5%

Sustainable Growth Rate: ~ 11.5%

Scenario 1
The company generated $1577 million FCF in 2012

• Start at $1577 million FCF
• Assume a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1577
1	1766
2	1978
3	2216
4	2481
5	2779
Terminal Value	52241

The firm's future free cash flows, discounted at a WACC of 5.96%, give a present value for the entire firm (Debt + Equity) of $48455 million. If the firm's fair value of debt is estimated at $5163 million, then the fair value of the firm's equity could be $43292 million.  $43292 million / 432 million outstanding shares is approximately $100 per share and a 20% margin of safety is $80/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 9.50% per year, then 2% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1577
1	1727
2	1891
3	2070
4	2267
5	2483
Terminal Value	68674

• Present Value of the entire firm (Debt + Equity): $60130 million
• Value of Equity: $54967 million or $127/share
• 20% margin of safety is $102/share

Sources

Morningstar.com

Yahoo! Finance

Costco Wholesale

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.