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 in our screens, Costco Wholesale Corp (COST).
Profile
Costco 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 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 enjoys over 60% market share in the domestic warehouse club industry. Internationally, Costco operates another 270 warehouses, primarily in markets such as Canada, Mexico, Japan, and the UK.
Recent Performance
Over the past twelve months the share price is up 63.61%.
Source: Google Finance
Inputs
- Discount Rate: 7%
- Terminal Growth Rate: 3%
- WACC: 7%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 7.02 | 6.56 |
| 2025 | 7.88 | 6.88 |
| 2026 | 8.85 | 7.22 |
| 2027 | 9.95 | 7.59 |
| 2028 | 11.17 | 7.96 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 287.63 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 205.07 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 36.22 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 241.30 billion
Net Debt
Net Debt = Total Debt – Total Cash = -3.70 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 245.00 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $553.04
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $553.04 | $888.05 | -60.58% |
Based on the DCF valuation, the stock is overvalued. The DCF value of $553.04 share is lower than the current market price of $888.05. The Margin of Safety is -60.58%.
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