Intrinsic value of Costco Wholesale - COST

Previous Close

$159.76

  Intrinsic Value

$106.18

stock screener

  Rating & Target

sell

-34%

  Value-price divergence*

-25%

Previous close

$159.76

 
Intrinsic value

$106.18

 
Up/down potential

-34%

 
Rating

sell

 
Value-price divergence*

-25%

*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
  5.70
  5.63
  5.57
  5.51
  5.46
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.20
  5.18
  5.16
  5.14
  5.13
  5.12
  5.11
  5.09
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
  5.04
  5.04
  5.03
Revenue, $m
  118,719
  125,486
  132,551
  139,930
  147,641
  155,701
  164,129
  172,946
  182,173
  191,830
  201,942
  212,532
  223,625
  235,249
  247,430
  260,197
  273,582
  287,616
  302,333
  317,767
  333,956
  350,938
  368,754
  387,446
  407,058
  427,638
  449,235
  471,900
  495,687
  520,653
  546,858
Variable operating expenses, $m
 
  121,596
  128,442
  135,592
  143,064
  150,874
  159,041
  167,585
  176,525
  185,883
  195,682
  205,943
  216,693
  227,956
  239,759
  252,131
  265,101
  278,700
  292,961
  307,916
  323,603
  340,059
  357,322
  375,435
  394,439
  414,382
  435,309
  457,271
  480,321
  504,513
  529,905
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
  121,596
  128,442
  135,592
  143,064
  150,874
  159,041
  167,585
  176,525
  185,883
  195,682
  205,943
  216,693
  227,956
  239,759
  252,131
  265,101
  278,700
  292,961
  307,916
  323,603
  340,059
  357,322
  375,435
  394,439
  414,382
  435,309
  457,271
  480,321
  504,513
  529,905
Operating income, $m
  3,672
  3,890
  4,109
  4,338
  4,577
  4,827
  5,088
  5,361
  5,647
  5,947
  6,260
  6,588
  6,932
  7,293
  7,670
  8,066
  8,481
  8,916
  9,372
  9,851
  10,353
  10,879
  11,431
  12,011
  12,619
  13,257
  13,926
  14,629
  15,366
  16,140
  16,953
EBITDA, $m
  4,927
  5,223
  5,517
  5,824
  6,145
  6,480
  6,831
  7,198
  7,582
  7,984
  8,405
  8,846
  9,307
  9,791
  10,298
  10,829
  11,387
  11,971
  12,583
  13,226
  13,899
  14,606
  15,348
  16,126
  16,942
  17,798
  18,697
  19,641
  20,631
  21,670
  22,760
Interest expense (income), $m
  123
  155
  194
  236
  279
  325
  372
  422
  474
  528
  585
  644
  707
  772
  840
  912
  987
  1,066
  1,148
  1,235
  1,326
  1,421
  1,521
  1,626
  1,736
  1,851
  1,972
  2,100
  2,233
  2,373
  2,520
Earnings before tax, $m
  3,619
  3,735
  3,915
  4,102
  4,298
  4,502
  4,716
  4,940
  5,174
  5,419
  5,675
  5,944
  6,226
  6,521
  6,830
  7,154
  7,494
  7,850
  8,224
  8,616
  9,027
  9,458
  9,910
  10,385
  10,883
  11,405
  11,954
  12,529
  13,133
  13,767
  14,433
Tax expense, $m
  1,243
  1,009
  1,057
  1,108
  1,160
  1,216
  1,273
  1,334
  1,397
  1,463
  1,532
  1,605
  1,681
  1,761
  1,844
  1,932
  2,023
  2,120
  2,220
  2,326
  2,437
  2,554
  2,676
  2,804
  2,938
  3,079
  3,228
  3,383
  3,546
  3,717
  3,897
Net income, $m
  2,350
  2,727
  2,858
  2,994
  3,137
  3,287
  3,443
  3,606
  3,777
  3,956
  4,143
  4,339
  4,545
  4,760
  4,986
  5,223
  5,471
  5,731
  6,003
  6,290
  6,590
  6,904
  7,235
  7,581
  7,945
  8,326
  8,726
  9,146
  9,587
  10,050
  10,536

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
  30,057
  31,749
  33,516
  35,363
  37,294
  39,312
  41,424
  43,634
  45,947
  48,369
  50,906
  53,563
  56,347
  59,265
  62,323
  65,529
  68,890
  72,415
  76,112
  79,989
  84,057
  88,324
  92,801
  97,499
  102,428
  107,601
  113,030
  118,728
  124,707
  130,984
Adjusted assets (=assets-cash), $m
  28,434
  30,057
  31,749
  33,516
  35,363
  37,294
  39,312
  41,424
  43,634
  45,947
  48,369
  50,906
  53,563
  56,347
  59,265
  62,323
  65,529
  68,890
  72,415
  76,112
  79,989
  84,057
  88,324
  92,801
  97,499
  102,428
  107,601
  113,030
  118,728
  124,707
  130,984
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
  17,192
  18,159
  19,170
  20,227
  21,331
  22,486
  23,694
  24,958
  26,281
  27,666
  29,117
  30,637
  32,229
  33,898
  35,647
  37,481
  39,403
  41,420
  43,534
  45,752
  48,079
  50,519
  53,080
  55,767
  58,586
  61,545
  64,650
  67,909
  71,330
  74,919
Working capital, $m
  -357
  -4,141
  -4,374
  -4,618
  -4,872
  -5,138
  -5,416
  -5,707
  -6,012
  -6,330
  -6,664
  -7,014
  -7,380
  -7,763
  -8,165
  -8,587
  -9,028
  -9,491
  -9,977
  -10,486
  -11,021
  -11,581
  -12,169
  -12,786
  -13,433
  -14,112
  -14,825
  -15,573
  -16,358
  -17,182
  -18,046
Total debt, $m
  5,535
  5,551
  6,739
  7,979
  9,276
  10,631
  12,048
  13,531
  15,082
  16,706
  18,406
  20,187
  22,052
  24,007
  26,055
  28,202
  30,452
  32,812
  35,286
  37,882
  40,604
  43,459
  46,455
  49,598
  52,895
  56,356
  59,987
  63,798
  67,798
  71,996
  76,402
Total liabilities, $m
  21,084
  21,100
  22,288
  23,528
  24,825
  26,180
  27,597
  29,080
  30,631
  32,255
  33,955
  35,736
  37,601
  39,556
  41,604
  43,751
  46,001
  48,361
  50,835
  53,431
  56,153
  59,008
  62,004
  65,147
  68,444
  71,905
  75,536
  79,347
  83,347
  87,545
  91,951
Total equity, $m
  12,079
  8,957
  9,461
  9,988
  10,538
  11,113
  11,715
  12,344
  13,003
  13,692
  14,414
  15,170
  15,962
  16,791
  17,661
  18,572
  19,528
  20,529
  21,580
  22,681
  23,837
  25,049
  26,321
  27,655
  29,055
  30,524
  32,065
  33,683
  35,381
  37,163
  39,033
Total liabilities and equity, $m
  33,163
  30,057
  31,749
  33,516
  35,363
  37,293
  39,312
  41,424
  43,634
  45,947
  48,369
  50,906
  53,563
  56,347
  59,265
  62,323
  65,529
  68,890
  72,415
  76,112
  79,990
  84,057
  88,325
  92,802
  97,499
  102,429
  107,601
  113,030
  118,728
  124,708
  130,984
Debt-to-equity ratio
  0.458
  0.620
  0.710
  0.800
  0.880
  0.960
  1.030
  1.100
  1.160
  1.220
  1.280
  1.330
  1.380
  1.430
  1.480
  1.520
  1.560
  1.600
  1.640
  1.670
  1.700
  1.730
  1.760
  1.790
  1.820
  1.850
  1.870
  1.890
  1.920
  1.940
  1.960
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
  2,727
  2,858
  2,994
  3,137
  3,287
  3,443
  3,606
  3,777
  3,956
  4,143
  4,339
  4,545
  4,760
  4,986
  5,223
  5,471
  5,731
  6,003
  6,290
  6,590
  6,904
  7,235
  7,581
  7,945
  8,326
  8,726
  9,146
  9,587
  10,050
  10,536
Depreciation, amort., depletion, $m
  1,255
  1,333
  1,408
  1,486
  1,568
  1,654
  1,743
  1,837
  1,935
  2,037
  2,145
  2,257
  2,375
  2,498
  2,628
  2,763
  2,905
  3,055
  3,211
  3,375
  3,547
  3,727
  3,916
  4,115
  4,323
  4,542
  4,771
  5,012
  5,264
  5,529
  5,808
Funds from operations, $m
  2,282
  4,059
  4,266
  4,481
  4,705
  4,940
  5,186
  5,443
  5,712
  5,993
  6,288
  6,596
  6,920
  7,259
  7,614
  7,986
  8,376
  8,785
  9,214
  9,664
  10,136
  10,631
  11,151
  11,696
  12,268
  12,868
  13,497
  14,158
  14,852
  15,580
  16,344
Change in working capital, $m
  -1,010
  -223
  -233
  -244
  -254
  -266
  -278
  -291
  -304
  -319
  -334
  -349
  -366
  -384
  -402
  -421
  -442
  -463
  -486
  -509
  -534
  -560
  -588
  -617
  -647
  -679
  -713
  -748
  -785
  -824
  -865
Cash from operations, $m
  3,292
  4,283
  4,499
  4,724
  4,960
  5,206
  5,464
  5,734
  6,016
  6,312
  6,621
  6,946
  7,286
  7,642
  8,016
  8,407
  8,818
  9,248
  9,700
  10,174
  10,670
  11,192
  11,739
  12,313
  12,915
  13,547
  14,210
  14,906
  15,637
  16,403
  17,208
Maintenance CAPEX, $m
  0
  -1,258
  -1,333
  -1,408
  -1,486
  -1,568
  -1,654
  -1,743
  -1,837
  -1,935
  -2,037
  -2,145
  -2,257
  -2,375
  -2,498
  -2,628
  -2,763
  -2,905
  -3,055
  -3,211
  -3,375
  -3,547
  -3,727
  -3,916
  -4,115
  -4,323
  -4,542
  -4,771
  -5,012
  -5,264
  -5,529
New CAPEX, $m
  -2,649
  -970
  -968
  -1,011
  -1,056
  -1,104
  -1,155
  -1,208
  -1,264
  -1,323
  -1,385
  -1,451
  -1,520
  -1,592
  -1,669
  -1,749
  -1,834
  -1,923
  -2,016
  -2,114
  -2,218
  -2,327
  -2,441
  -2,561
  -2,687
  -2,819
  -2,959
  -3,105
  -3,259
  -3,420
  -3,590
Cash from investing activities, $m
  -2,345
  -2,228
  -2,301
  -2,419
  -2,542
  -2,672
  -2,809
  -2,951
  -3,101
  -3,258
  -3,422
  -3,596
  -3,777
  -3,967
  -4,167
  -4,377
  -4,597
  -4,828
  -5,071
  -5,325
  -5,593
  -5,874
  -6,168
  -6,477
  -6,802
  -7,142
  -7,501
  -7,876
  -8,271
  -8,684
  -9,119
Free cash flow, $m
  947
  2,056
  2,198
  2,305
  2,417
  2,534
  2,656
  2,783
  2,915
  3,054
  3,199
  3,350
  3,509
  3,675
  3,849
  4,030
  4,221
  4,420
  4,629
  4,848
  5,078
  5,319
  5,571
  5,836
  6,113
  6,404
  6,710
  7,030
  7,366
  7,719
  8,089
Issuance/(repayment) of debt, $m
  -1,022
  1,126
  1,188
  1,241
  1,296
  1,355
  1,417
  1,483
  1,551
  1,624
  1,700
  1,781
  1,865
  1,954
  2,048
  2,147
  2,251
  2,360
  2,475
  2,595
  2,722
  2,855
  2,996
  3,143
  3,298
  3,460
  3,631
  3,811
  4,000
  4,198
  4,406
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
  1,126
  1,188
  1,241
  1,296
  1,355
  1,417
  1,483
  1,551
  1,624
  1,700
  1,781
  1,865
  1,954
  2,048
  2,147
  2,251
  2,360
  2,475
  2,595
  2,722
  2,855
  2,996
  3,143
  3,298
  3,460
  3,631
  3,811
  4,000
  4,198
  4,406
Total cash flow (excl. dividends), $m
  -676
  3,181
  3,386
  3,546
  3,714
  3,889
  4,073
  4,265
  4,467
  4,678
  4,899
  5,131
  5,374
  5,629
  5,897
  6,177
  6,471
  6,780
  7,104
  7,443
  7,800
  8,174
  8,566
  8,978
  9,411
  9,865
  10,341
  10,841
  11,366
  11,917
  12,495
Retained Cash Flow (-), $m
  -1,462
  -497
  -504
  -527
  -550
  -575
  -602
  -629
  -659
  -689
  -722
  -756
  -792
  -830
  -869
  -911
  -955
  -1,002
  -1,050
  -1,102
  -1,156
  -1,212
  -1,272
  -1,334
  -1,400
  -1,469
  -1,542
  -1,618
  -1,698
  -1,782
  -1,870
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
 
  6,303
  2,882
  3,019
  3,163
  3,314
  3,471
  3,636
  3,808
  3,988
  4,177
  4,375
  4,582
  4,800
  5,027
  5,266
  5,516
  5,778
  6,053
  6,342
  6,644
  6,962
  7,295
  7,644
  8,011
  8,396
  8,799
  9,223
  9,668
  10,135
  10,625
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
 
  6,044
  2,638
  2,628
  2,605
  2,569
  2,519
  2,456
  2,380
  2,291
  2,190
  2,078
  1,955
  1,825
  1,688
  1,546
  1,402
  1,257
  1,115
  976
  844
  720
  605
  501
  408
  327
  257
  198
  150
  111
  80
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 29.7
Price to Sales 0.6
Price to Book 5.8
Price to Tangible Book
Price to Cash Flow 21.2
Price to Free Cash Flow 108.7
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 5.7% 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 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 $70.0 billion.

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COMPANY NEWS

▶ Target Surpasses 2Q17 EPS Estimate, Guides High   [Aug-17-17 12:35PM  Market Realist]
▶ One of Costco's greatest perks is under siege   [01:04PM  Business Insider]
▶ Target: Hope Floats?   [12:24PM  Barrons.com]
▶ How Wall Street Analysts View Target Stock   [09:06AM  Market Realist]
▶ Costco names chairman to replace late co-founder Jeff Brotman   [Aug-11-17 04:10PM  American City Business Journals]
▶ Costco Wholesale Corporation Election of New Chairman   [Aug-10-17 07:43PM  GlobeNewswire]
▶ Walmart wants to scan shoppers facial expressions   [01:31PM  Yahoo Finance Video]
▶ Service for Costco's Jeff Brotman to be held Tuesday   [08:02PM  American City Business Journals]
▶ Whole Foods Market: As Good as It Gets?   [02:07PM  Barrons.com]
▶ 3 Warren Buffett Stocks to Buy in August   [08:32AM  Motley Fool]
▶ [$$] Jeff Brotman Hit the Big Time With Costco   [Aug-04-17 11:46PM  The Wall Street Journal]
▶ Are Wines from Costco and Sams Club Worth Drinking?   [11:46PM  The Wall Street Journal]
▶ Costco: Another Down Day? Really?   [01:37PM  Barrons.com]
▶ Cramer: This Bull Will Gore You Without a Thought   [Aug-03-17 07:01PM  TheStreet.com]
▶ Costco's End Isn't Near   [05:45PM  TheStreet.com]
▶ Costco Is Worth Too Much Money: Guggenheim   [06:06PM  Investopedia]
▶ Costco co-founder Jeff Brotman dies at 74   [04:31PM  American City Business Journals]
▶ Costco Is Worth Too Much Money, Top Firm Says   [Aug-01-17 07:40PM  TheStreet.com]
▶ Costco co-founder Jeff Brotman dies   [07:06PM  Associated Press]
▶ Costco Rebound Lacks Strong Base   [11:54AM  TheStreet.com]
▶ Is It Time To Sample Costco?   [Jul-31-17 10:41PM  Forbes]
▶ Best Buy Shows There Is Life After Amazon Disrupts You   [Jul-30-17 11:45AM  Motley Fool]
▶ Forget Costco: These 3 Stocks Have Doubled This Year   [Jul-28-17 07:36PM  Motley Fool]
▶ Bon appetit: Americans are cooking less than ever   [Jul-27-17 01:11PM  Yahoo Finance Video]
▶ 7 Companies Amazon Is Killing   [07:56AM  Investopedia]
▶ Citigroup CEO touts Costco partnership   [Jul-26-17 07:01PM  CNBC Videos]
▶ Costco: Don't Call It an Uptrend   [02:58PM  TheStreet.com]
Stock chart of COST 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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