Intrinsic value of Costco Wholesale - COST

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$157.13

  Intrinsic Value

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  Value-price divergence*

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$157.13

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of COST stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 68.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.17
  3.20
  3.38
  3.54
  3.69
  3.82
  3.94
  4.04
  4.14
  4.23
  4.30
  4.37
  4.44
  4.49
  4.54
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.80
  4.82
  4.84
  4.86
  4.87
  4.88
  4.90
  4.91
  4.92
Revenue, $m
  118,719
  122,518
  126,659
  131,145
  135,982
  141,175
  146,733
  152,666
  158,985
  165,703
  172,832
  180,389
  188,389
  196,851
  205,793
  215,235
  225,199
  235,708
  246,786
  258,459
  270,753
  283,698
  297,324
  311,664
  326,750
  342,618
  359,306
  376,854
  395,302
  414,695
  435,078
Variable operating expenses, $m
 
  118,720
  122,733
  127,080
  131,766
  136,799
  142,184
  147,934
  154,057
  160,566
  167,474
  174,797
  182,549
  190,749
  199,414
  208,563
  218,218
  228,401
  239,136
  250,446
  262,360
  274,904
  288,107
  302,002
  316,620
  331,997
  348,168
  365,171
  383,047
  401,839
  421,590
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  115,047
  118,720
  122,733
  127,080
  131,766
  136,799
  142,184
  147,934
  154,057
  160,566
  167,474
  174,797
  182,549
  190,749
  199,414
  208,563
  218,218
  228,401
  239,136
  250,446
  262,360
  274,904
  288,107
  302,002
  316,620
  331,997
  348,168
  365,171
  383,047
  401,839
  421,590
Operating income, $m
  3,672
  3,798
  3,926
  4,066
  4,215
  4,376
  4,549
  4,733
  4,929
  5,137
  5,358
  5,592
  5,840
  6,102
  6,380
  6,672
  6,981
  7,307
  7,650
  8,012
  8,393
  8,795
  9,217
  9,662
  10,129
  10,621
  11,138
  11,682
  12,254
  12,856
  13,487
EBITDA, $m
  4,927
  5,099
  5,272
  5,458
  5,660
  5,876
  6,107
  6,354
  6,617
  6,897
  7,193
  7,508
  7,841
  8,193
  8,565
  8,958
  9,373
  9,810
  10,271
  10,757
  11,269
  11,808
  12,375
  12,971
  13,599
  14,260
  14,954
  15,685
  16,453
  17,260
  18,108
Interest expense (income), $m
  123
  155
  177
  201
  228
  256
  287
  319
  354
  391
  431
  473
  517
  564
  614
  667
  722
  781
  843
  908
  977
  1,049
  1,125
  1,206
  1,290
  1,379
  1,472
  1,570
  1,674
  1,782
  1,896
Earnings before tax, $m
  3,619
  3,643
  3,750
  3,864
  3,988
  4,120
  4,262
  4,413
  4,574
  4,745
  4,927
  5,119
  5,323
  5,538
  5,765
  6,005
  6,259
  6,526
  6,807
  7,104
  7,417
  7,745
  8,092
  8,456
  8,839
  9,242
  9,666
  10,112
  10,581
  11,073
  11,591
Tax expense, $m
  1,243
  984
  1,012
  1,043
  1,077
  1,113
  1,151
  1,192
  1,235
  1,281
  1,330
  1,382
  1,437
  1,495
  1,557
  1,621
  1,690
  1,762
  1,838
  1,918
  2,002
  2,091
  2,185
  2,283
  2,387
  2,495
  2,610
  2,730
  2,857
  2,990
  3,130
Net income, $m
  2,350
  2,660
  2,737
  2,821
  2,911
  3,008
  3,111
  3,222
  3,339
  3,464
  3,597
  3,737
  3,886
  4,043
  4,209
  4,384
  4,569
  4,764
  4,969
  5,186
  5,414
  5,654
  5,907
  6,173
  6,453
  6,747
  7,056
  7,382
  7,724
  8,084
  8,462

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  4,729
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  33,163
  29,346
  30,338
  31,412
  32,570
  33,814
  35,146
  36,567
  38,080
  39,689
  41,397
  43,207
  45,123
  47,150
  49,292
  51,553
  53,940
  56,457
  59,110
  61,906
  64,851
  67,952
  71,215
  74,650
  78,263
  82,064
  86,061
  90,264
  94,683
  99,328
  104,210
Adjusted assets (=assets-cash), $m
  28,434
  29,346
  30,338
  31,412
  32,570
  33,814
  35,146
  36,567
  38,080
  39,689
  41,397
  43,207
  45,123
  47,150
  49,292
  51,553
  53,940
  56,457
  59,110
  61,906
  64,851
  67,952
  71,215
  74,650
  78,263
  82,064
  86,061
  90,264
  94,683
  99,328
  104,210
Revenue / Adjusted assets
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
  4.175
Average production assets, $m
  16,222
  16,785
  17,352
  17,967
  18,630
  19,341
  20,102
  20,915
  21,781
  22,701
  23,678
  24,713
  25,809
  26,969
  28,194
  29,487
  30,852
  32,292
  33,810
  35,409
  37,093
  38,867
  40,733
  42,698
  44,765
  46,939
  49,225
  51,629
  54,156
  56,813
  59,606
Working capital, $m
  -357
  -4,043
  -4,180
  -4,328
  -4,487
  -4,659
  -4,842
  -5,038
  -5,247
  -5,468
  -5,703
  -5,953
  -6,217
  -6,496
  -6,791
  -7,103
  -7,432
  -7,778
  -8,144
  -8,529
  -8,935
  -9,362
  -9,812
  -10,285
  -10,783
  -11,306
  -11,857
  -12,436
  -13,045
  -13,685
  -14,358
Total debt, $m
  5,535
  5,052
  5,748
  6,502
  7,315
  8,189
  9,123
  10,121
  11,183
  12,313
  13,512
  14,782
  16,128
  17,550
  19,054
  20,641
  22,317
  24,084
  25,947
  27,909
  29,976
  32,153
  34,444
  36,855
  39,392
  42,060
  44,866
  47,817
  50,919
  54,179
  57,607
Total liabilities, $m
  21,084
  20,601
  21,297
  22,051
  22,864
  23,738
  24,672
  25,670
  26,732
  27,862
  29,061
  30,331
  31,677
  33,099
  34,603
  36,190
  37,866
  39,633
  41,496
  43,458
  45,525
  47,702
  49,993
  52,404
  54,941
  57,609
  60,415
  63,366
  66,468
  69,728
  73,156
Total equity, $m
  12,079
  8,745
  9,041
  9,361
  9,706
  10,077
  10,473
  10,897
  11,348
  11,827
  12,336
  12,876
  13,447
  14,051
  14,689
  15,363
  16,074
  16,824
  17,615
  18,448
  19,326
  20,250
  21,222
  22,246
  23,322
  24,455
  25,646
  26,899
  28,216
  29,600
  31,055
Total liabilities and equity, $m
  33,163
  29,346
  30,338
  31,412
  32,570
  33,815
  35,145
  36,567
  38,080
  39,689
  41,397
  43,207
  45,124
  47,150
  49,292
  51,553
  53,940
  56,457
  59,111
  61,906
  64,851
  67,952
  71,215
  74,650
  78,263
  82,064
  86,061
  90,265
  94,684
  99,328
  104,211
Debt-to-equity ratio
  0.458
  0.580
  0.640
  0.690
  0.750
  0.810
  0.870
  0.930
  0.990
  1.040
  1.100
  1.150
  1.200
  1.250
  1.300
  1.340
  1.390
  1.430
  1.470
  1.510
  1.550
  1.590
  1.620
  1.660
  1.690
  1.720
  1.750
  1.780
  1.800
  1.830
  1.860
Adjusted equity ratio
  0.258
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298
  0.298

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,350
  2,660
  2,737
  2,821
  2,911
  3,008
  3,111
  3,222
  3,339
  3,464
  3,597
  3,737
  3,886
  4,043
  4,209
  4,384
  4,569
  4,764
  4,969
  5,186
  5,414
  5,654
  5,907
  6,173
  6,453
  6,747
  7,056
  7,382
  7,724
  8,084
  8,462
Depreciation, amort., depletion, $m
  1,255
  1,301
  1,345
  1,393
  1,444
  1,499
  1,558
  1,621
  1,688
  1,760
  1,836
  1,916
  2,001
  2,091
  2,186
  2,286
  2,392
  2,503
  2,621
  2,745
  2,875
  3,013
  3,158
  3,310
  3,470
  3,639
  3,816
  4,002
  4,198
  4,404
  4,621
Funds from operations, $m
  2,282
  3,961
  4,082
  4,214
  4,355
  4,507
  4,670
  4,843
  5,028
  5,224
  5,432
  5,653
  5,886
  6,133
  6,394
  6,670
  6,961
  7,267
  7,590
  7,931
  8,290
  8,667
  9,065
  9,483
  9,923
  10,386
  10,872
  11,384
  11,922
  12,488
  13,082
Change in working capital, $m
  -1,010
  -125
  -137
  -148
  -160
  -171
  -183
  -196
  -209
  -222
  -235
  -249
  -264
  -279
  -295
  -312
  -329
  -347
  -366
  -385
  -406
  -427
  -450
  -473
  -498
  -524
  -551
  -579
  -609
  -640
  -673
Cash from operations, $m
  3,292
  4,907
  4,219
  4,362
  4,515
  4,679
  4,853
  5,039
  5,236
  5,446
  5,667
  5,902
  6,150
  6,413
  6,689
  6,981
  7,289
  7,614
  7,956
  8,316
  8,695
  9,094
  9,514
  9,956
  10,421
  10,909
  11,423
  11,963
  12,531
  13,128
  13,755
Maintenance CAPEX, $m
  0
  -1,258
  -1,301
  -1,345
  -1,393
  -1,444
  -1,499
  -1,558
  -1,621
  -1,688
  -1,760
  -1,836
  -1,916
  -2,001
  -2,091
  -2,186
  -2,286
  -2,392
  -2,503
  -2,621
  -2,745
  -2,875
  -3,013
  -3,158
  -3,310
  -3,470
  -3,639
  -3,816
  -4,002
  -4,198
  -4,404
New CAPEX, $m
  -2,649
  -563
  -567
  -615
  -663
  -711
  -761
  -813
  -866
  -920
  -977
  -1,035
  -1,096
  -1,159
  -1,225
  -1,294
  -1,365
  -1,440
  -1,518
  -1,599
  -1,684
  -1,773
  -1,867
  -1,964
  -2,067
  -2,174
  -2,286
  -2,404
  -2,527
  -2,657
  -2,792
Cash from investing activities, $m
  -2,345
  -1,821
  -1,868
  -1,960
  -2,056
  -2,155
  -2,260
  -2,371
  -2,487
  -2,608
  -2,737
  -2,871
  -3,012
  -3,160
  -3,316
  -3,480
  -3,651
  -3,832
  -4,021
  -4,220
  -4,429
  -4,648
  -4,880
  -5,122
  -5,377
  -5,644
  -5,925
  -6,220
  -6,529
  -6,855
  -7,196
Free cash flow, $m
  947
  3,087
  2,351
  2,402
  2,460
  2,523
  2,592
  2,668
  2,749
  2,837
  2,931
  3,031
  3,138
  3,253
  3,374
  3,502
  3,638
  3,783
  3,935
  4,096
  4,266
  4,445
  4,635
  4,834
  5,044
  5,265
  5,498
  5,743
  6,001
  6,273
  6,558
Issuance/(repayment) of debt, $m
  -1,022
  627
  696
  754
  813
  873
  935
  998
  1,062
  1,129
  1,199
  1,271
  1,345
  1,423
  1,504
  1,588
  1,675
  1,767
  1,863
  1,963
  2,067
  2,177
  2,291
  2,411
  2,537
  2,668
  2,806
  2,950
  3,102
  3,261
  3,427
Issuance/(repurchase) of shares, $m
  -486
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,673
  627
  696
  754
  813
  873
  935
  998
  1,062
  1,129
  1,199
  1,271
  1,345
  1,423
  1,504
  1,588
  1,675
  1,767
  1,863
  1,963
  2,067
  2,177
  2,291
  2,411
  2,537
  2,668
  2,806
  2,950
  3,102
  3,261
  3,427
Total cash flow (excl. dividends), $m
  -676
  3,713
  3,047
  3,156
  3,273
  3,396
  3,527
  3,665
  3,812
  3,966
  4,130
  4,302
  4,484
  4,675
  4,877
  5,090
  5,314
  5,550
  5,798
  6,059
  6,333
  6,622
  6,926
  7,245
  7,581
  7,933
  8,304
  8,694
  9,103
  9,533
  9,985
Retained Cash Flow (-), $m
  -1,462
  -285
  -296
  -320
  -345
  -371
  -397
  -423
  -451
  -479
  -509
  -539
  -571
  -604
  -638
  -674
  -711
  -750
  -791
  -833
  -878
  -924
  -973
  -1,023
  -1,077
  -1,133
  -1,191
  -1,252
  -1,317
  -1,384
  -1,455
Prev. year cash balance distribution, $m
 
  3,619
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  7,047
  2,751
  2,836
  2,928
  3,025
  3,130
  3,242
  3,361
  3,487
  3,621
  3,763
  3,913
  4,071
  4,239
  4,416
  4,603
  4,799
  5,007
  5,226
  5,456
  5,698
  5,953
  6,221
  6,504
  6,801
  7,113
  7,441
  7,786
  8,149
  8,531
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  6,757
  2,519
  2,468
  2,411
  2,345
  2,272
  2,190
  2,100
  2,003
  1,898
  1,787
  1,670
  1,548
  1,423
  1,296
  1,170
  1,044
  922
  805
  693
  589
  494
  408
  331
  265
  208
  160
  120
  89
  64
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. The company was formerly known as Costco Companies, Inc. Costco Wholesale Corporation was founded in 1976 and is based in Issaquah, Washington.

FINANCIAL RATIOS  of  Costco Wholesale (COST)

Valuation Ratios
P/E Ratio 29.3
Price to Sales 0.6
Price to Book 5.7
Price to Tangible Book
Price to Cash Flow 20.9
Price to Free Cash Flow 106.9
Growth Rates
Sales Growth Rate 2.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.7%
Cap. Spend. - 3 Yr. Gr. Rate 4.9%
Financial Strength
Quick Ratio 4
Current Ratio 0
LT Debt to Equity 36.6%
Total Debt to Equity 45.8%
Interest Coverage 30
Management Effectiveness
Return On Assets 7.3%
Ret/ On Assets - 3 Yr. Avg. 7.2%
Return On Total Capital 13.6%
Ret/ On T. Cap. - 3 Yr. Avg. 13.2%
Return On Equity 20.7%
Return On Equity - 3 Yr. Avg. 19.7%
Asset Turnover 3.6
Profitability Ratios
Gross Margin 13.3%
Gross Margin - 3 Yr. Avg. 13%
EBITDA Margin 4.2%
EBITDA Margin - 3 Yr. Avg. 4.1%
Operating Margin 3.1%
Oper. Margin - 3 Yr. Avg. 3%
Pre-Tax Margin 3%
Pre-Tax Margin - 3 Yr. Avg. 3%
Net Profit Margin 2%
Net Profit Margin - 3 Yr. Avg. 2%
Effective Tax Rate 34.3%
Eff/ Tax Rate - 3 Yr. Avg. 34.1%
Payout Ratio 31.7%

COST stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the COST stock intrinsic value calculation we used $118719 million for the last fiscal year's total revenue generated by Costco Wholesale. The default revenue input number comes from 2016 income statement of Costco Wholesale. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our COST stock valuation model: a) initial revenue growth rate of 3.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for COST is calculated based on our internal credit rating of Costco Wholesale, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Costco Wholesale.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of COST stock the variable cost ratio is equal to 96.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for COST stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Costco Wholesale.

Corporate tax rate of 27% is the nominal tax rate for Costco Wholesale. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the COST stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for COST are equal to 13.7%.

Life of production assets of 12.9 years is the average useful life of capital assets used in Costco Wholesale operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for COST is equal to -3.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $12079 million for Costco Wholesale - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 438.172 million for Costco Wholesale is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Costco Wholesale at the current share price and the inputted number of shares is $68.8 billion.


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COMPANY NEWS

▶ Costco and Amazon even have deals on caskets   [Jun-25-17 12:34PM  MarketWatch]
▶ Better Buy: Costco Wholesale vs. Wal-Mart   [Jun-24-17 04:39PM  Motley Fool]
▶ Warren Buffett's 5 Highest-Quality Companies   [05:34PM  GuruFocus.com]
▶ Costco Is Still in the Game   [12:15PM  TheStreet.com]
▶ What If Walmart Bought Costco? Not Likely   [Jun-22-17 02:00PM  TheStreet.com]
▶ Costco Bears Need a Reality Check   [01:41PM  Motley Fool]
▶ Analysts Recommendations for Target Stock   [09:07AM  Market Realist]
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▶ Whole Foods Stock Signals Another Bidder Is Coming, But Who?   [04:15PM  Investor's Business Daily]
▶ Food fallout: grocery stocks downgraded   [12:21PM  CNBC Videos]
▶ Amazon-Whole Foods: Price Likely to Climb   [Jun-18-17 10:00AM  TheStreet.com]
▶ How Whole Foods helps Amazon fend off Wal-Mart   [Jun-17-17 09:25AM  MarketWatch]
▶ Alexa to Bezos: "Buying Whole Foods"   [Jun-16-17 11:58PM  Forbes]
▶ Costco: Uh-Uh Amazon   [02:35PM  Barrons.com]
Stock chart of COST Financial statements of COST Annual reports of COST
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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