Intrinsic value of Costco Wholesale - COST

Previous Close

$191.56

  Intrinsic Value

$248.44

stock screener

  Rating & Target

buy

+30%

Previous close

$191.56

 
Intrinsic value

$248.44

 
Up/down potential

+30%

 
Rating

buy

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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  8.68
  13.20
  12.38
  11.64
  10.98
  10.38
  9.84
  9.36
  8.92
  8.53
  8.18
  7.86
  7.57
  7.32
  7.08
  6.88
  6.69
  6.52
  6.37
  6.23
  6.11
  6.00
  5.90
  5.81
  5.73
  5.65
  5.59
  5.53
  5.48
  5.43
  5.39
Revenue, $m
  129,025
  146,056
  164,138
  183,247
  203,364
  224,473
  246,565
  269,638
  293,696
  318,747
  344,811
  371,910
  400,076
  429,345
  459,761
  491,374
  524,239
  558,416
  593,974
  630,983
  669,521
  709,672
  751,523
  795,168
  840,705
  888,239
  937,880
  989,743
  1,043,950
  1,100,627
  1,159,910
Variable operating expenses, $m
 
  139,776
  157,080
  175,367
  194,619
  214,820
  235,963
  258,044
  281,067
  305,041
  329,984
  355,918
  382,873
  410,883
  439,992
  470,245
  501,696
  534,404
  568,433
  603,850
  640,732
  679,156
  719,208
  760,976
  804,555
  850,045
  897,551
  947,184
  999,060
  1,053,300
  1,110,033
Fixed operating expenses, $m
 
  1,456
  1,492
  1,529
  1,567
  1,607
  1,647
  1,688
  1,730
  1,773
  1,818
  1,863
  1,910
  1,957
  2,006
  2,057
  2,108
  2,161
  2,215
  2,270
  2,327
  2,385
  2,445
  2,506
  2,568
  2,633
  2,698
  2,766
  2,835
  2,906
  2,979
Total operating expenses, $m
  124,914
  141,232
  158,572
  176,896
  196,186
  216,427
  237,610
  259,732
  282,797
  306,814
  331,802
  357,781
  384,783
  412,840
  441,998
  472,302
  503,804
  536,565
  570,648
  606,120
  643,059
  681,541
  721,653
  763,482
  807,123
  852,678
  900,249
  949,950
  1,001,895
  1,056,206
  1,113,012
Operating income, $m
  4,111
  4,825
  5,566
  6,350
  7,177
  8,046
  8,956
  9,907
  10,899
  11,933
  13,009
  14,129
  15,294
  16,504
  17,763
  19,073
  20,434
  21,851
  23,326
  24,862
  26,463
  28,131
  29,871
  31,686
  33,582
  35,562
  37,630
  39,793
  42,055
  44,421
  46,898
EBITDA, $m
  5,481
  6,377
  7,310
  8,297
  9,338
  10,431
  11,575
  12,771
  14,019
  15,319
  16,673
  18,081
  19,544
  21,066
  22,648
  24,293
  26,004
  27,784
  29,637
  31,566
  33,576
  35,671
  37,856
  40,135
  42,514
  44,999
  47,595
  50,309
  53,147
  56,115
  59,222
Interest expense (income), $m
  131
  230
  348
  473
  605
  744
  890
  1,043
  1,203
  1,369
  1,542
  1,723
  1,910
  2,105
  2,307
  2,518
  2,736
  2,963
  3,200
  3,446
  3,702
  3,968
  4,246
  4,535
  4,837
  5,152
  5,481
  5,824
  6,183
  6,558
  6,949
Earnings before tax, $m
  4,039
  4,595
  5,218
  5,877
  6,572
  7,301
  8,065
  8,863
  9,696
  10,564
  11,467
  12,406
  13,383
  14,400
  15,456
  16,555
  17,698
  18,888
  20,126
  21,416
  22,761
  24,163
  25,625
  27,151
  28,745
  30,410
  32,150
  33,969
  35,872
  37,864
  39,948
Tax expense, $m
  1,325
  1,241
  1,409
  1,587
  1,774
  1,971
  2,178
  2,393
  2,618
  2,852
  3,096
  3,350
  3,614
  3,888
  4,173
  4,470
  4,778
  5,100
  5,434
  5,782
  6,145
  6,524
  6,919
  7,331
  7,761
  8,211
  8,680
  9,172
  9,685
  10,223
  10,786
Net income, $m
  2,679
  3,354
  3,809
  4,290
  4,797
  5,330
  5,888
  6,470
  7,078
  7,711
  8,371
  9,057
  9,770
  10,512
  11,283
  12,085
  12,920
  13,788
  14,692
  15,634
  16,615
  17,639
  18,706
  19,820
  20,984
  22,199
  23,469
  24,797
  26,187
  27,640
  29,162

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  5,779
  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
  36,347
  34,602
  38,886
  43,413
  48,179
  53,180
  58,414
  63,880
  69,580
  75,515
  81,689
  88,109
  94,782
  101,716
  108,922
  116,412
  124,198
  132,295
  140,719
  149,487
  158,617
  168,129
  178,044
  188,384
  199,172
  210,433
  222,194
  234,481
  247,323
  260,750
  274,795
Adjusted assets (=assets-cash), $m
  30,568
  34,602
  38,886
  43,413
  48,179
  53,180
  58,414
  63,880
  69,580
  75,515
  81,689
  88,109
  94,782
  101,716
  108,922
  116,412
  124,198
  132,295
  140,719
  149,487
  158,617
  168,129
  178,044
  188,384
  199,172
  210,433
  222,194
  234,481
  247,323
  260,750
  274,795
Revenue / Adjusted assets
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
  4.221
Average production assets, $m
  17,602
  19,864
  22,323
  24,922
  27,657
  30,528
  33,533
  36,671
  39,943
  43,350
  46,894
  50,580
  54,410
  58,391
  62,528
  66,827
  71,296
  75,945
  80,780
  85,814
  91,055
  96,515
  102,207
  108,143
  114,336
  120,801
  127,552
  134,605
  141,977
  149,685
  157,748
Working capital, $m
  -178
  -6,719
  -7,550
  -8,429
  -9,355
  -10,326
  -11,342
  -12,403
  -13,510
  -14,662
  -15,861
  -17,108
  -18,403
  -19,750
  -21,149
  -22,603
  -24,115
  -25,687
  -27,323
  -29,025
  -30,798
  -32,645
  -34,570
  -36,578
  -38,672
  -40,859
  -43,142
  -45,528
  -48,022
  -50,629
  -53,356
Total debt, $m
  6,659
  9,948
  13,521
  17,297
  21,271
  25,442
  29,807
  34,366
  39,119
  44,069
  49,219
  54,573
  60,138
  65,922
  71,931
  78,177
  84,671
  91,424
  98,449
  105,762
  113,376
  121,309
  129,579
  138,202
  147,199
  156,591
  166,400
  176,647
  187,357
  198,556
  210,269
Total liabilities, $m
  25,569
  28,858
  32,431
  36,207
  40,181
  44,352
  48,717
  53,276
  58,029
  62,979
  68,129
  73,483
  79,048
  84,832
  90,841
  97,087
  103,581
  110,334
  117,359
  124,672
  132,286
  140,219
  148,489
  157,112
  166,109
  175,501
  185,310
  195,557
  206,267
  217,466
  229,179
Total equity, $m
  10,778
  5,744
  6,455
  7,207
  7,998
  8,828
  9,697
  10,604
  11,550
  12,535
  13,560
  14,626
  15,734
  16,885
  18,081
  19,324
  20,617
  21,961
  23,359
  24,815
  26,330
  27,909
  29,555
  31,272
  33,063
  34,932
  36,884
  38,924
  41,056
  43,285
  45,616
Total liabilities and equity, $m
  36,347
  34,602
  38,886
  43,414
  48,179
  53,180
  58,414
  63,880
  69,579
  75,514
  81,689
  88,109
  94,782
  101,717
  108,922
  116,411
  124,198
  132,295
  140,718
  149,487
  158,616
  168,128
  178,044
  188,384
  199,172
  210,433
  222,194
  234,481
  247,323
  260,751
  274,795
Debt-to-equity ratio
  0.618
  1.730
  2.090
  2.400
  2.660
  2.880
  3.070
  3.240
  3.390
  3.520
  3.630
  3.730
  3.820
  3.900
  3.980
  4.050
  4.110
  4.160
  4.210
  4.260
  4.310
  4.350
  4.380
  4.420
  4.450
  4.480
  4.510
  4.540
  4.560
  4.590
  4.610
Adjusted equity ratio
  0.164
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166
  0.166

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,679
  3,354
  3,809
  4,290
  4,797
  5,330
  5,888
  6,470
  7,078
  7,711
  8,371
  9,057
  9,770
  10,512
  11,283
  12,085
  12,920
  13,788
  14,692
  15,634
  16,615
  17,639
  18,706
  19,820
  20,984
  22,199
  23,469
  24,797
  26,187
  27,640
  29,162
Depreciation, amort., depletion, $m
  1,370
  1,552
  1,744
  1,947
  2,161
  2,385
  2,620
  2,865
  3,121
  3,387
  3,664
  3,952
  4,251
  4,562
  4,885
  5,221
  5,570
  5,933
  6,311
  6,704
  7,114
  7,540
  7,985
  8,449
  8,932
  9,438
  9,965
  10,516
  11,092
  11,694
  12,324
Funds from operations, $m
  8,897
  4,906
  5,553
  6,237
  6,958
  7,715
  8,507
  9,335
  10,199
  11,098
  12,034
  13,008
  14,021
  15,073
  16,168
  17,306
  18,490
  19,721
  21,003
  22,338
  23,729
  25,179
  26,691
  28,269
  29,916
  31,637
  33,434
  35,313
  37,279
  39,335
  41,486
Change in working capital, $m
  2,171
  -783
  -832
  -879
  -925
  -971
  -1,016
  -1,061
  -1,107
  -1,152
  -1,199
  -1,247
  -1,296
  -1,346
  -1,399
  -1,454
  -1,512
  -1,572
  -1,636
  -1,702
  -1,773
  -1,847
  -1,925
  -2,008
  -2,095
  -2,187
  -2,283
  -2,386
  -2,494
  -2,607
  -2,727
Cash from operations, $m
  6,726
  5,690
  6,385
  7,116
  7,884
  8,686
  9,524
  10,396
  11,305
  12,250
  13,233
  14,255
  15,316
  16,420
  17,567
  18,760
  20,001
  21,293
  22,639
  24,041
  25,502
  27,026
  28,616
  30,277
  32,011
  33,823
  35,718
  37,699
  39,772
  41,942
  44,213
Maintenance CAPEX, $m
  0
  -1,375
  -1,552
  -1,744
  -1,947
  -2,161
  -2,385
  -2,620
  -2,865
  -3,121
  -3,387
  -3,664
  -3,952
  -4,251
  -4,562
  -4,885
  -5,221
  -5,570
  -5,933
  -6,311
  -6,704
  -7,114
  -7,540
  -7,985
  -8,449
  -8,932
  -9,438
  -9,965
  -10,516
  -11,092
  -11,694
New CAPEX, $m
  -2,502
  -2,262
  -2,459
  -2,599
  -2,736
  -2,871
  -3,005
  -3,138
  -3,272
  -3,407
  -3,545
  -3,685
  -3,831
  -3,981
  -4,137
  -4,299
  -4,470
  -4,648
  -4,836
  -5,033
  -5,241
  -5,460
  -5,692
  -5,936
  -6,193
  -6,465
  -6,751
  -7,053
  -7,372
  -7,708
  -8,062
Cash from investing activities, $m
  -2,366
  -3,637
  -4,011
  -4,343
  -4,683
  -5,032
  -5,390
  -5,758
  -6,137
  -6,528
  -6,932
  -7,349
  -7,783
  -8,232
  -8,699
  -9,184
  -9,691
  -10,218
  -10,769
  -11,344
  -11,945
  -12,574
  -13,232
  -13,921
  -14,642
  -15,397
  -16,189
  -17,018
  -17,888
  -18,800
  -19,756
Free cash flow, $m
  4,360
  2,053
  2,374
  2,774
  3,201
  3,654
  4,134
  4,639
  5,169
  5,723
  6,302
  6,906
  7,534
  8,188
  8,869
  9,576
  10,311
  11,075
  11,870
  12,696
  13,556
  14,452
  15,384
  16,356
  17,369
  18,426
  19,529
  20,681
  21,884
  23,142
  24,457
Issuance/(repayment) of debt, $m
  1,346
  3,375
  3,573
  3,776
  3,975
  4,171
  4,365
  4,559
  4,753
  4,950
  5,150
  5,354
  5,565
  5,783
  6,010
  6,246
  6,494
  6,753
  7,026
  7,312
  7,615
  7,933
  8,269
  8,623
  8,997
  9,392
  9,808
  10,247
  10,710
  11,199
  11,713
Issuance/(repurchase) of shares, $m
  -469
  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  
  686
  3,375
  3,573
  3,776
  3,975
  4,171
  4,365
  4,559
  4,753
  4,950
  5,150
  5,354
  5,565
  5,783
  6,010
  6,246
  6,494
  6,753
  7,026
  7,312
  7,615
  7,933
  8,269
  8,623
  8,997
  9,392
  9,808
  10,247
  10,710
  11,199
  11,713
Total cash flow (excl. dividends), $m
  5,071
  5,428
  5,946
  6,549
  7,175
  7,825
  8,499
  9,198
  9,922
  10,673
  11,452
  12,260
  13,099
  13,972
  14,878
  15,822
  16,804
  17,828
  18,895
  20,009
  21,171
  22,385
  23,653
  24,980
  26,367
  27,818
  29,337
  30,928
  32,594
  34,340
  36,170
Retained Cash Flow (-), $m
  1,301
  -659
  -711
  -752
  -791
  -830
  -869
  -907
  -946
  -985
  -1,025
  -1,066
  -1,108
  -1,151
  -1,196
  -1,243
  -1,292
  -1,344
  -1,398
  -1,455
  -1,516
  -1,579
  -1,646
  -1,716
  -1,791
  -1,869
  -1,952
  -2,040
  -2,132
  -2,229
  -2,331
Prev. year cash balance distribution, $m
 
  5,693
  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
 
  10,462
  5,235
  5,798
  6,384
  6,995
  7,630
  8,290
  8,976
  9,688
  10,427
  11,194
  11,992
  12,820
  13,682
  14,579
  15,512
  16,484
  17,497
  18,553
  19,655
  20,806
  22,008
  23,263
  24,576
  25,949
  27,385
  28,888
  30,463
  32,111
  33,838
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
 
  10,031
  4,793
  5,046
  5,257
  5,422
  5,538
  5,601
  5,610
  5,565
  5,466
  5,316
  5,117
  4,875
  4,593
  4,280
  3,942
  3,587
  3,222
  2,857
  2,498
  2,152
  1,826
  1,525
  1,252
  1,009
  799
  620
  471
  351
  255
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 is engaged in the operation of membership warehouses in the United States and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, Spain, and through its subsidiaries in Taiwan and Korea. As of August 28, 2016, the Company operated 715 warehouses across the world. The Company's average warehouse space is approximately 144,000 square feet. The Company's warehouses on average operate on a seven-day, 70-hour week. The Company offers merchandise in various categories, which include foods (including dry foods, packaged foods and groceries); sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies); hardlines (including appliances, electronics, health and beauty aids, hardware, and garden and patio); fresh foods (including meat, produce, deli and bakery); softlines (including apparel and small appliances), and other (including gas stations and pharmacy).

FINANCIAL RATIOS  of  Costco Wholesale (COST)

Valuation Ratios
P/E Ratio 31.3
Price to Sales 0.6
Price to Book 7.8
Price to Tangible Book
Price to Cash Flow 12.5
Price to Free Cash Flow 19.8
Growth Rates
Sales Growth Rate 8.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -5.5%
Cap. Spend. - 3 Yr. Gr. Rate 4.7%
Financial Strength
Quick Ratio 67
Current Ratio 0
LT Debt to Equity 61%
Total Debt to Equity 61.8%
Interest Coverage 32
Management Effectiveness
Return On Assets 8%
Ret/ On Assets - 3 Yr. Avg. 7.6%
Return On Total Capital 15.3%
Ret/ On T. Cap. - 3 Yr. Avg. 14.2%
Return On Equity 23.4%
Return On Equity - 3 Yr. Avg. 21.6%
Asset Turnover 3.7
Profitability Ratios
Gross Margin 13.3%
Gross Margin - 3 Yr. Avg. 13.2%
EBITDA Margin 4.3%
EBITDA Margin - 3 Yr. Avg. 4.2%
Operating Margin 3.2%
Oper. Margin - 3 Yr. Avg. 3.1%
Pre-Tax Margin 3.1%
Pre-Tax Margin - 3 Yr. Avg. 3.1%
Net Profit Margin 2.1%
Net Profit Margin - 3 Yr. Avg. 2%
Effective Tax Rate 32.8%
Eff/ Tax Rate - 3 Yr. Avg. 33.4%
Payout Ratio 145.7%

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 $129025 million for the last fiscal year's total revenue generated by Costco Wholesale. The default revenue input number comes from 2017 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 13.2% 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 95.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1420 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 13.6%.

Life of production assets of 12.8 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 -4.6%. 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 - $10778 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 440.361 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 $84.4 billion.

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COMPANY NEWS

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▶ Costco, Aldi planning new stores for southeast Houston area   [09:30AM  American City Business Journals]
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▶ Don't Shop at Costco Until Things Are REALLY On Sale!   [Feb-08-18 02:09PM  TheStreet.com]
▶ Costco Wholesale Corporation Reports January Sales Results   [Feb-07-18 09:00PM  GlobeNewswire]
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▶ Watch out Costco the Starbucks co-branded Visa is now available   [Feb-01-18 03:45PM  American City Business Journals]
▶ Here's why stocks are flying again: NYSE trader   [Jan-31-18 01:54PM  Yahoo Finance Video]
▶ Costco Wholesale Corp Declares Dividend   [10:24AM  GuruFocus.com]
▶ Correction: American Express-CEO Interview story   [09:59AM  Associated Press]
▶ Here's Why the Best Is Yet to Come for Costco   [Jan-29-18 09:34AM  Motley Fool]
▶ [$$] By Shrinking, Can Sams Club Keep Up With Costco?   [12:16AM  The Wall Street Journal]
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▶ What the New Amazon Prime Charges Look Like   [Jan-25-18 09:03AM  Market Realist]
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▶ Amazon-Whole Foods Is Not What the Market Expected   [Jan-21-18 07:12AM  Motley Fool]
▶ How Costco Is Eating Sam's Club's Lunch   [Jan-20-18 04:42PM  Motley Fool]
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▶ Unpacking Holiday Results for Major Retailers   [Jan-17-18 06:40PM  Motley Fool]
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▶ Sam's Club exit in Alaska shakes businesses statewide   [Jan-15-18 10:28AM  Associated Press]
▶ How to Read Microsofts HQ Modernization Move   [07:35AM  Market Realist]
▶ What Is Walmart's Long Game With Sam's Club?   [Jan-13-18 09:25AM  TheStreet.com]
▶ What Drove Costco Stock Yesterday?   [10:34AM  Market Realist]
▶ Walmart's Pain Is Costco's Gain   [10:31AM  Barrons.com]
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Financial statements 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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