Intrinsic value of Costco Wholesale - COST

Previous Close

$188.30

  Intrinsic Value

$185.29

stock screener

  Rating & Target

hold

-2%

Previous close

$188.30

 
Intrinsic value

$185.29

 
Up/down potential

-2%

 
Rating

hold

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 2017), $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 82.3

 

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
  8.70
  8.33
  8.00
  7.70
  7.43
  7.18
  6.97
  6.77
  6.59
  6.43
  6.29
  6.16
  6.04
  5.94
  5.85
  5.76
  5.69
  5.62
  5.56
  5.50
  5.45
  5.40
  5.36
  5.33
  5.30
  5.27
  5.24
  5.22
  5.19
  5.17
Revenue, $m
  129,025
  140,250
  151,933
  164,083
  176,713
  189,839
  203,478
  217,653
  232,388
  247,708
  263,644
  280,228
  297,493
  315,476
  334,217
  353,757
  374,140
  395,412
  417,623
  440,823
  465,067
  490,413
  516,919
  544,648
  573,667
  604,043
  635,850
  669,162
  704,060
  740,627
  778,949
Variable operating expenses, $m
 
  134,219
  145,400
  157,028
  169,114
  181,675
  194,729
  208,294
  222,395
  237,057
  252,308
  268,178
  284,701
  301,911
  319,846
  338,546
  358,052
  378,409
  399,665
  421,868
  445,070
  469,325
  494,691
  521,228
  548,999
  578,069
  608,508
  640,388
  673,786
  708,780
  745,454
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
  135,675
  146,892
  158,557
  170,681
  183,282
  196,376
  209,982
  224,125
  238,830
  254,126
  270,041
  286,611
  303,868
  321,852
  340,603
  360,160
  380,570
  401,880
  424,138
  447,397
  471,710
  497,136
  523,734
  551,567
  580,702
  611,206
  643,154
  676,621
  711,686
  748,433
Operating income, $m
  4,111
  4,575
  5,041
  5,526
  6,031
  6,556
  7,103
  7,671
  8,263
  8,878
  9,519
  10,187
  10,882
  11,608
  12,365
  13,155
  13,980
  14,842
  15,743
  16,685
  17,671
  18,703
  19,783
  20,914
  22,099
  23,341
  24,643
  26,008
  27,440
  28,941
  30,516
EBITDA, $m
  5,481
  6,065
  6,656
  7,270
  7,909
  8,573
  9,265
  9,984
  10,732
  11,510
  12,320
  13,164
  14,043
  14,960
  15,916
  16,914
  17,955
  19,043
  20,180
  21,369
  22,612
  23,913
  25,275
  26,701
  28,194
  29,759
  31,399
  33,118
  34,920
  36,810
  38,793
Interest expense (income), $m
  131
  230
  308
  389
  473
  560
  651
  745
  843
  945
  1,051
  1,161
  1,276
  1,395
  1,520
  1,649
  1,785
  1,925
  2,073
  2,226
  2,387
  2,554
  2,730
  2,913
  3,105
  3,305
  3,515
  3,735
  3,966
  4,207
  4,460
Earnings before tax, $m
  4,039
  4,345
  4,733
  5,138
  5,558
  5,996
  6,452
  6,926
  7,419
  7,933
  8,468
  9,025
  9,606
  10,213
  10,845
  11,506
  12,195
  12,917
  13,670
  14,459
  15,284
  16,148
  17,053
  18,001
  18,995
  20,036
  21,128
  22,273
  23,474
  24,734
  26,056
Tax expense, $m
  1,325
  1,173
  1,278
  1,387
  1,501
  1,619
  1,742
  1,870
  2,003
  2,142
  2,286
  2,437
  2,594
  2,757
  2,928
  3,107
  3,293
  3,487
  3,691
  3,904
  4,127
  4,360
  4,604
  4,860
  5,129
  5,410
  5,704
  6,014
  6,338
  6,678
  7,035
Net income, $m
  2,679
  3,172
  3,455
  3,750
  4,058
  4,377
  4,710
  5,056
  5,416
  5,791
  6,182
  6,588
  7,013
  7,455
  7,917
  8,399
  8,903
  9,429
  9,979
  10,555
  11,158
  11,788
  12,449
  13,141
  13,866
  14,626
  15,423
  16,259
  17,136
  18,056
  19,021

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
  33,227
  35,995
  38,873
  41,865
  44,975
  48,206
  51,564
  55,055
  58,685
  62,460
  66,389
  70,479
  74,740
  79,180
  83,809
  88,638
  93,677
  98,939
  104,436
  110,179
  116,184
  122,464
  129,033
  135,908
  143,104
  150,640
  158,532
  166,799
  175,462
  184,541
Adjusted assets (=assets-cash), $m
  30,568
  33,227
  35,995
  38,873
  41,865
  44,975
  48,206
  51,564
  55,055
  58,685
  62,460
  66,389
  70,479
  74,740
  79,180
  83,809
  88,638
  93,677
  98,939
  104,436
  110,179
  116,184
  122,464
  129,033
  135,908
  143,104
  150,640
  158,532
  166,799
  175,462
  184,541
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
  19,074
  20,663
  22,315
  24,033
  25,818
  27,673
  29,601
  31,605
  33,688
  35,856
  38,111
  40,459
  42,905
  45,454
  48,111
  50,883
  53,776
  56,797
  59,952
  63,249
  66,696
  70,301
  74,072
  78,019
  82,150
  86,476
  91,006
  95,752
  100,725
  105,937
Working capital, $m
  -178
  -6,452
  -6,989
  -7,548
  -8,129
  -8,733
  -9,360
  -10,012
  -10,690
  -11,395
  -12,128
  -12,890
  -13,685
  -14,512
  -15,374
  -16,273
  -17,210
  -18,189
  -19,211
  -20,278
  -21,393
  -22,559
  -23,778
  -25,054
  -26,389
  -27,786
  -29,249
  -30,781
  -32,387
  -34,069
  -35,832
Total debt, $m
  6,659
  8,801
  11,109
  13,510
  16,006
  18,599
  21,294
  24,095
  27,006
  30,033
  33,182
  36,458
  39,870
  43,423
  47,126
  50,987
  55,014
  59,217
  63,605
  68,189
  72,980
  77,987
  83,225
  88,704
  94,437
  100,439
  106,723
  113,305
  120,201
  127,426
  134,997
Total liabilities, $m
  25,569
  27,711
  30,019
  32,420
  34,916
  37,509
  40,204
  43,005
  45,916
  48,943
  52,092
  55,368
  58,780
  62,333
  66,036
  69,897
  73,924
  78,127
  82,515
  87,099
  91,890
  96,897
  102,135
  107,614
  113,347
  119,349
  125,633
  132,215
  139,111
  146,336
  153,907
Total equity, $m
  10,778
  5,516
  5,975
  6,453
  6,950
  7,466
  8,002
  8,560
  9,139
  9,742
  10,368
  11,021
  11,700
  12,407
  13,144
  13,912
  14,714
  15,550
  16,424
  17,336
  18,290
  19,287
  20,329
  21,419
  22,561
  23,755
  25,006
  26,316
  27,689
  29,127
  30,634
Total liabilities and equity, $m
  36,347
  33,227
  35,994
  38,873
  41,866
  44,975
  48,206
  51,565
  55,055
  58,685
  62,460
  66,389
  70,480
  74,740
  79,180
  83,809
  88,638
  93,677
  98,939
  104,435
  110,180
  116,184
  122,464
  129,033
  135,908
  143,104
  150,639
  158,531
  166,800
  175,463
  184,541
Debt-to-equity ratio
  0.618
  1.600
  1.860
  2.090
  2.300
  2.490
  2.660
  2.810
  2.950
  3.080
  3.200
  3.310
  3.410
  3.500
  3.590
  3.660
  3.740
  3.810
  3.870
  3.930
  3.990
  4.040
  4.090
  4.140
  4.190
  4.230
  4.270
  4.310
  4.340
  4.370
  4.410
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
  3,172
  3,455
  3,750
  4,058
  4,377
  4,710
  5,056
  5,416
  5,791
  6,182
  6,588
  7,013
  7,455
  7,917
  8,399
  8,903
  9,429
  9,979
  10,555
  11,158
  11,788
  12,449
  13,141
  13,866
  14,626
  15,423
  16,259
  17,136
  18,056
  19,021
Depreciation, amort., depletion, $m
  1,370
  1,490
  1,614
  1,743
  1,878
  2,017
  2,162
  2,313
  2,469
  2,632
  2,801
  2,977
  3,161
  3,352
  3,551
  3,759
  3,975
  4,201
  4,437
  4,684
  4,941
  5,211
  5,492
  5,787
  6,095
  6,418
  6,756
  7,110
  7,481
  7,869
  8,276
Funds from operations, $m
  8,897
  4,662
  5,070
  5,494
  5,935
  6,394
  6,872
  7,368
  7,885
  8,423
  8,983
  9,566
  10,174
  10,807
  11,468
  12,158
  12,878
  13,630
  14,417
  15,239
  16,099
  16,999
  17,941
  18,928
  19,961
  21,044
  22,179
  23,369
  24,617
  25,925
  27,297
Change in working capital, $m
  2,171
  -516
  -537
  -559
  -581
  -604
  -627
  -652
  -678
  -705
  -733
  -763
  -794
  -827
  -862
  -899
  -938
  -979
  -1,022
  -1,067
  -1,115
  -1,166
  -1,219
  -1,276
  -1,335
  -1,397
  -1,463
  -1,532
  -1,605
  -1,682
  -1,763
Cash from operations, $m
  6,726
  5,179
  5,607
  6,053
  6,516
  6,998
  7,499
  8,020
  8,563
  9,128
  9,716
  10,329
  10,968
  11,634
  12,330
  13,057
  13,816
  14,609
  15,438
  16,306
  17,214
  18,165
  19,160
  20,203
  21,296
  22,442
  23,642
  24,901
  26,222
  27,607
  29,060
Maintenance CAPEX, $m
  0
  -1,375
  -1,490
  -1,614
  -1,743
  -1,878
  -2,017
  -2,162
  -2,313
  -2,469
  -2,632
  -2,801
  -2,977
  -3,161
  -3,352
  -3,551
  -3,759
  -3,975
  -4,201
  -4,437
  -4,684
  -4,941
  -5,211
  -5,492
  -5,787
  -6,095
  -6,418
  -6,756
  -7,110
  -7,481
  -7,869
New CAPEX, $m
  -2,502
  -1,472
  -1,589
  -1,652
  -1,718
  -1,785
  -1,855
  -1,928
  -2,004
  -2,084
  -2,167
  -2,255
  -2,348
  -2,446
  -2,549
  -2,657
  -2,772
  -2,893
  -3,021
  -3,155
  -3,297
  -3,447
  -3,605
  -3,771
  -3,947
  -4,131
  -4,326
  -4,531
  -4,746
  -4,973
  -5,212
Cash from investing activities, $m
  -2,366
  -2,847
  -3,079
  -3,266
  -3,461
  -3,663
  -3,872
  -4,090
  -4,317
  -4,553
  -4,799
  -5,056
  -5,325
  -5,607
  -5,901
  -6,208
  -6,531
  -6,868
  -7,222
  -7,592
  -7,981
  -8,388
  -8,816
  -9,263
  -9,734
  -10,226
  -10,744
  -11,287
  -11,856
  -12,454
  -13,081
Free cash flow, $m
  4,360
  2,331
  2,528
  2,786
  3,055
  3,335
  3,627
  3,931
  4,246
  4,575
  4,917
  5,272
  5,642
  6,028
  6,429
  6,848
  7,285
  7,741
  8,216
  8,714
  9,233
  9,777
  10,345
  10,940
  11,563
  12,215
  12,899
  13,615
  14,366
  15,153
  15,979
Issuance/(repayment) of debt, $m
  1,346
  2,228
  2,308
  2,401
  2,495
  2,593
  2,695
  2,801
  2,911
  3,027
  3,149
  3,277
  3,411
  3,553
  3,703
  3,861
  4,027
  4,203
  4,388
  4,584
  4,790
  5,008
  5,237
  5,479
  5,734
  6,002
  6,284
  6,582
  6,895
  7,225
  7,572
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
  2,228
  2,308
  2,401
  2,495
  2,593
  2,695
  2,801
  2,911
  3,027
  3,149
  3,277
  3,411
  3,553
  3,703
  3,861
  4,027
  4,203
  4,388
  4,584
  4,790
  5,008
  5,237
  5,479
  5,734
  6,002
  6,284
  6,582
  6,895
  7,225
  7,572
Total cash flow (excl. dividends), $m
  5,071
  4,559
  4,836
  5,187
  5,551
  5,929
  6,322
  6,731
  7,158
  7,602
  8,065
  8,549
  9,054
  9,581
  10,132
  10,709
  11,312
  11,944
  12,605
  13,298
  14,024
  14,784
  15,582
  16,419
  17,296
  18,217
  19,183
  20,197
  21,261
  22,378
  23,551
Retained Cash Flow (-), $m
  1,301
  -431
  -459
  -478
  -497
  -516
  -536
  -557
  -579
  -603
  -627
  -652
  -679
  -707
  -737
  -768
  -802
  -837
  -873
  -912
  -953
  -997
  -1,042
  -1,091
  -1,141
  -1,195
  -1,251
  -1,310
  -1,372
  -1,438
  -1,507
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
 
  9,822
  4,377
  4,709
  5,054
  5,413
  5,786
  6,174
  6,578
  7,000
  7,439
  7,897
  8,375
  8,874
  9,395
  9,940
  10,511
  11,107
  11,731
  12,385
  13,070
  13,788
  14,540
  15,328
  16,155
  17,022
  17,932
  18,887
  19,889
  20,940
  22,044
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
 
  9,417
  4,007
  4,098
  4,161
  4,195
  4,199
  4,171
  4,112
  4,021
  3,900
  3,750
  3,574
  3,374
  3,154
  2,918
  2,671
  2,417
  2,160
  1,907
  1,661
  1,426
  1,206
  1,005
  823
  662
  523
  405
  308
  229
  166
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 30.7
Price to Sales 0.6
Price to Book 7.6
Price to Tangible Book
Price to Cash Flow 12.2
Price to Free Cash Flow 19.5
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 8.7% 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 436.96 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 $82.3 billion.

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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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