Intrinsic value of Costco Wholesale - COST

Previous Close

$158.46

  Intrinsic Value

$116.46

stock screener

  Rating & Target

sell

-27%

  Value-price divergence*

+23%

Previous close

$158.46

 
Intrinsic value

$116.46

 
Up/down potential

-27%

 
Rating

sell

 
Value-price divergence*

+23%

*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 70.0

 

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
  7.80
  7.52
  7.27
  7.04
  6.84
  6.65
  6.49
  6.34
  6.21
  6.08
  5.98
  5.88
  5.79
  5.71
  5.64
  5.58
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
  5.28
  5.25
  5.22
  5.20
  5.18
  5.16
  5.15
  5.13
Revenue, $m
  118,719
  127,979
  137,603
  147,604
  157,997
  168,800
  180,030
  191,711
  203,864
  216,514
  229,689
  243,416
  257,725
  272,650
  288,223
  304,480
  321,459
  339,200
  357,744
  377,135
  397,418
  418,642
  440,856
  464,115
  488,472
  513,987
  540,719
  568,733
  598,096
  628,877
  661,151
Variable operating expenses, $m
 
  124,012
  133,337
  143,028
  153,099
  163,567
  174,450
  185,768
  197,544
  209,802
  222,568
  235,870
  249,736
  264,197
  279,288
  295,041
  311,494
  328,685
  346,654
  365,443
  385,098
  405,664
  427,190
  449,727
  473,329
  498,053
  523,957
  551,103
  579,555
  609,382
  640,655
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
  124,012
  133,337
  143,028
  153,099
  163,567
  174,450
  185,768
  197,544
  209,802
  222,568
  235,870
  249,736
  264,197
  279,288
  295,041
  311,494
  328,685
  346,654
  365,443
  385,098
  405,664
  427,190
  449,727
  473,329
  498,053
  523,957
  551,103
  579,555
  609,382
  640,655
Operating income, $m
  3,672
  3,967
  4,266
  4,576
  4,898
  5,233
  5,581
  5,943
  6,320
  6,712
  7,120
  7,546
  7,989
  8,452
  8,935
  9,439
  9,965
  10,515
  11,090
  11,691
  12,320
  12,978
  13,667
  14,388
  15,143
  15,934
  16,762
  17,631
  18,541
  19,495
  20,496
EBITDA, $m
  4,927
  5,327
  5,727
  6,143
  6,576
  7,025
  7,493
  7,979
  8,485
  9,011
  9,560
  10,131
  10,727
  11,348
  11,996
  12,672
  13,379
  14,118
  14,889
  15,696
  16,541
  17,424
  18,349
  19,317
  20,330
  21,392
  22,505
  23,671
  24,893
  26,174
  27,517
Interest expense (income), $m
  123
  155
  209
  266
  324
  386
  449
  515
  584
  656
  730
  808
  888
  973
  1,060
  1,152
  1,248
  1,348
  1,452
  1,561
  1,675
  1,795
  1,920
  2,050
  2,187
  2,330
  2,481
  2,638
  2,803
  2,976
  3,157
Earnings before tax, $m
  3,619
  3,812
  4,057
  4,310
  4,573
  4,847
  5,132
  5,428
  5,736
  6,056
  6,390
  6,738
  7,101
  7,480
  7,875
  8,287
  8,718
  9,168
  9,638
  10,130
  10,645
  11,183
  11,747
  12,337
  12,956
  13,603
  14,282
  14,993
  15,738
  16,520
  17,339
Tax expense, $m
  1,243
  1,029
  1,095
  1,164
  1,235
  1,309
  1,386
  1,465
  1,549
  1,635
  1,725
  1,819
  1,917
  2,020
  2,126
  2,237
  2,354
  2,475
  2,602
  2,735
  2,874
  3,019
  3,172
  3,331
  3,498
  3,673
  3,856
  4,048
  4,249
  4,460
  4,682
Net income, $m
  2,350
  2,783
  2,961
  3,146
  3,339
  3,538
  3,746
  3,962
  4,187
  4,421
  4,665
  4,919
  5,184
  5,460
  5,748
  6,049
  6,364
  6,692
  7,036
  7,395
  7,771
  8,164
  8,575
  9,006
  9,458
  9,930
  10,426
  10,945
  11,489
  12,059
  12,657

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
  30,654
  32,959
  35,354
  37,844
  40,431
  43,121
  45,919
  48,830
  51,860
  55,015
  58,303
  61,731
  65,305
  69,035
  72,929
  76,996
  81,246
  85,687
  90,332
  95,190
  100,273
  105,594
  111,165
  116,999
  123,111
  129,514
  136,224
  143,257
  150,629
  158,359
Adjusted assets (=assets-cash), $m
  28,434
  30,654
  32,959
  35,354
  37,844
  40,431
  43,121
  45,919
  48,830
  51,860
  55,015
  58,303
  61,731
  65,305
  69,035
  72,929
  76,996
  81,246
  85,687
  90,332
  95,190
  100,273
  105,594
  111,165
  116,999
  123,111
  129,514
  136,224
  143,257
  150,629
  158,359
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
  17,533
  18,852
  20,222
  21,646
  23,126
  24,664
  26,264
  27,929
  29,662
  31,467
  33,348
  35,308
  37,353
  39,486
  41,714
  44,040
  46,470
  49,011
  51,667
  54,446
  57,354
  60,397
  63,584
  66,921
  70,416
  74,079
  77,916
  81,939
  86,156
  90,578
Working capital, $m
  -357
  -4,223
  -4,541
  -4,871
  -5,214
  -5,570
  -5,941
  -6,326
  -6,728
  -7,145
  -7,580
  -8,033
  -8,505
  -8,997
  -9,511
  -10,048
  -10,608
  -11,194
  -11,806
  -12,445
  -13,115
  -13,815
  -14,548
  -15,316
  -16,120
  -16,962
  -17,844
  -18,768
  -19,737
  -20,753
  -21,818
Total debt, $m
  5,535
  5,970
  7,588
  9,270
  11,017
  12,834
  14,722
  16,686
  18,729
  20,857
  23,072
  25,380
  27,786
  30,295
  32,914
  35,647
  38,502
  41,485
  44,603
  47,864
  51,274
  54,843
  58,578
  62,489
  66,585
  70,875
  75,370
  80,080
  85,017
  90,193
  95,619
Total liabilities, $m
  21,084
  21,519
  23,137
  24,819
  26,566
  28,383
  30,271
  32,235
  34,278
  36,406
  38,621
  40,929
  43,335
  45,844
  48,463
  51,196
  54,051
  57,034
  60,152
  63,413
  66,823
  70,392
  74,127
  78,038
  82,134
  86,424
  90,919
  95,629
  100,566
  105,742
  111,168
Total equity, $m
  12,079
  9,135
  9,822
  10,536
  11,277
  12,048
  12,850
  13,684
  14,551
  15,454
  16,395
  17,374
  18,396
  19,461
  20,573
  21,733
  22,945
  24,211
  25,535
  26,919
  28,367
  29,881
  31,467
  33,127
  34,866
  36,687
  38,595
  40,595
  42,690
  44,888
  47,191
Total liabilities and equity, $m
  33,163
  30,654
  32,959
  35,355
  37,843
  40,431
  43,121
  45,919
  48,829
  51,860
  55,016
  58,303
  61,731
  65,305
  69,036
  72,929
  76,996
  81,245
  85,687
  90,332
  95,190
  100,273
  105,594
  111,165
  117,000
  123,111
  129,514
  136,224
  143,256
  150,630
  158,359
Debt-to-equity ratio
  0.458
  0.650
  0.770
  0.880
  0.980
  1.070
  1.150
  1.220
  1.290
  1.350
  1.410
  1.460
  1.510
  1.560
  1.600
  1.640
  1.680
  1.710
  1.750
  1.780
  1.810
  1.840
  1.860
  1.890
  1.910
  1.930
  1.950
  1.970
  1.990
  2.010
  2.030
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
  2,783
  2,961
  3,146
  3,339
  3,538
  3,746
  3,962
  4,187
  4,421
  4,665
  4,919
  5,184
  5,460
  5,748
  6,049
  6,364
  6,692
  7,036
  7,395
  7,771
  8,164
  8,575
  9,006
  9,458
  9,930
  10,426
  10,945
  11,489
  12,059
  12,657
Depreciation, amort., depletion, $m
  1,255
  1,359
  1,461
  1,568
  1,678
  1,793
  1,912
  2,036
  2,165
  2,299
  2,439
  2,585
  2,737
  2,896
  3,061
  3,234
  3,414
  3,602
  3,799
  4,005
  4,221
  4,446
  4,682
  4,929
  5,188
  5,459
  5,743
  6,040
  6,352
  6,679
  7,022
Funds from operations, $m
  2,282
  4,142
  4,423
  4,714
  5,017
  5,331
  5,658
  5,998
  6,352
  6,721
  7,104
  7,504
  7,921
  8,356
  8,809
  9,283
  9,778
  10,295
  10,835
  11,400
  11,991
  12,610
  13,257
  13,935
  14,645
  15,389
  16,168
  16,985
  17,841
  18,738
  19,679
Change in working capital, $m
  -1,010
  -306
  -318
  -330
  -343
  -356
  -371
  -385
  -401
  -417
  -435
  -453
  -472
  -493
  -514
  -536
  -560
  -585
  -612
  -640
  -669
  -700
  -733
  -768
  -804
  -842
  -882
  -924
  -969
  -1,016
  -1,065
Cash from operations, $m
  3,292
  4,448
  4,740
  5,044
  5,360
  5,688
  6,029
  6,384
  6,753
  7,138
  7,539
  7,957
  8,393
  8,848
  9,323
  9,820
  10,338
  10,880
  11,447
  12,040
  12,661
  13,310
  13,990
  14,703
  15,449
  16,231
  17,050
  17,909
  18,810
  19,754
  20,744
Maintenance CAPEX, $m
  0
  -1,258
  -1,359
  -1,461
  -1,568
  -1,678
  -1,793
  -1,912
  -2,036
  -2,165
  -2,299
  -2,439
  -2,585
  -2,737
  -2,896
  -3,061
  -3,234
  -3,414
  -3,602
  -3,799
  -4,005
  -4,221
  -4,446
  -4,682
  -4,929
  -5,188
  -5,459
  -5,743
  -6,040
  -6,352
  -6,679
New CAPEX, $m
  -2,649
  -1,311
  -1,318
  -1,370
  -1,424
  -1,480
  -1,539
  -1,600
  -1,665
  -1,733
  -1,805
  -1,881
  -1,960
  -2,045
  -2,133
  -2,227
  -2,326
  -2,430
  -2,541
  -2,657
  -2,779
  -2,908
  -3,043
  -3,186
  -3,337
  -3,495
  -3,662
  -3,838
  -4,023
  -4,217
  -4,421
Cash from investing activities, $m
  -2,345
  -2,569
  -2,677
  -2,831
  -2,992
  -3,158
  -3,332
  -3,512
  -3,701
  -3,898
  -4,104
  -4,320
  -4,545
  -4,782
  -5,029
  -5,288
  -5,560
  -5,844
  -6,143
  -6,456
  -6,784
  -7,129
  -7,489
  -7,868
  -8,266
  -8,683
  -9,121
  -9,581
  -10,063
  -10,569
  -11,100
Free cash flow, $m
  947
  1,879
  2,063
  2,213
  2,368
  2,530
  2,697
  2,872
  3,052
  3,240
  3,435
  3,637
  3,848
  4,066
  4,294
  4,531
  4,778
  5,036
  5,304
  5,584
  5,877
  6,182
  6,501
  6,834
  7,183
  7,548
  7,929
  8,329
  8,747
  9,185
  9,644
Issuance/(repayment) of debt, $m
  -1,022
  1,545
  1,618
  1,682
  1,748
  1,816
  1,888
  1,964
  2,043
  2,127
  2,215
  2,308
  2,406
  2,509
  2,618
  2,734
  2,855
  2,983
  3,118
  3,260
  3,410
  3,569
  3,735
  3,911
  4,096
  4,290
  4,495
  4,710
  4,937
  5,176
  5,427
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
  1,545
  1,618
  1,682
  1,748
  1,816
  1,888
  1,964
  2,043
  2,127
  2,215
  2,308
  2,406
  2,509
  2,618
  2,734
  2,855
  2,983
  3,118
  3,260
  3,410
  3,569
  3,735
  3,911
  4,096
  4,290
  4,495
  4,710
  4,937
  5,176
  5,427
Total cash flow (excl. dividends), $m
  -676
  3,424
  3,681
  3,894
  4,116
  4,346
  4,586
  4,836
  5,096
  5,367
  5,650
  5,945
  6,254
  6,576
  6,913
  7,265
  7,633
  8,019
  8,422
  8,845
  9,287
  9,751
  10,236
  10,745
  11,279
  11,838
  12,424
  13,039
  13,684
  14,361
  15,070
Retained Cash Flow (-), $m
  -1,462
  -675
  -687
  -714
  -742
  -771
  -802
  -834
  -867
  -903
  -940
  -980
  -1,021
  -1,065
  -1,112
  -1,160
  -1,212
  -1,266
  -1,324
  -1,384
  -1,448
  -1,515
  -1,586
  -1,660
  -1,739
  -1,821
  -1,908
  -2,000
  -2,096
  -2,197
  -2,304
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
 
  6,368
  2,994
  3,180
  3,374
  3,575
  3,784
  4,002
  4,228
  4,464
  4,710
  4,966
  5,232
  5,511
  5,801
  6,104
  6,421
  6,752
  7,099
  7,461
  7,839
  8,236
  8,651
  9,085
  9,540
  10,017
  10,516
  11,040
  11,588
  12,164
  12,767
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
 
  6,106
  2,741
  2,768
  2,778
  2,771
  2,746
  2,704
  2,643
  2,564
  2,469
  2,358
  2,233
  2,095
  1,948
  1,792
  1,632
  1,469
  1,307
  1,149
  996
  852
  718
  595
  486
  390
  307
  237
  179
  133
  96
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 29.5
Price to Sales 0.6
Price to Book 5.7
Price to Tangible Book
Price to Cash Flow 21.1
Price to Free Cash Flow 107.8
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 7.8% 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 441.85 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 $70.0 billion.

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COMPANY NEWS

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▶ Is the Costco (COST) Stock Dividend Safe? Yes, But   [Oct-16-17 03:38PM  InvestorPlace]
▶ Costco is still cheaper than Whole Foods   [Oct-14-17 10:30AM  CNBC]
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▶ Amazon beats out Google as 'most talked about': FactSet   [Oct-12-17 01:18PM  Yahoo Finance Video]
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▶ Will Analysts Upgrade Walmart Stock?   [11:05AM  Market Realist]
▶ Amazon looks to deliver items straight to your car   [Oct-10-17 04:47PM  Yahoo Finance Video]
▶ Better Buy: Costco Wholesale Corporation vs. Target   [Oct-09-17 06:58PM  Motley Fool]
▶ Costco: Amazon Victim Could Come Back   [12:34PM  Barrons.com]
▶ Costco Set to Retrace All the Previous Rally   [11:02AM  TheStreet.com]
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▶ Company News For Oct 9, 2017   [09:27AM  Zacks]
▶ What Analysts Suggest for Costco Stock   [09:11AM  Market Realist]
▶ What Happened in the Stock Market Today   [05:07PM  Motley Fool]
▶ Costco and Hess slide while Omega Protein climbs   [04:29PM  Associated Press]
▶ Costco takes aim at Amazon and Wal-Mart   [04:06PM  Reuters Videos]
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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