Stock Analysis on Net
Stock Analysis on Net

Costco Wholesale Corp. (NASDAQ:COST)

Present Value of Free Cash Flow to Equity (FCFE)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

Costco Wholesale Corp., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.78%
01 FCFE0 6,361
1 FCFE1 7,545 = 6,361 × (1 + 18.62%) 6,750
2 FCFE2 8,781 = 7,545 × (1 + 16.37%) 7,027
3 FCFE3 10,021 = 8,781 × (1 + 14.12%) 7,175
4 FCFE4 11,210 = 10,021 × (1 + 11.87%) 7,180
5 FCFE5 12,289 = 11,210 × (1 + 9.62%) 7,042
5 Terminal value (TV5) 624,794 = 12,289 × (1 + 9.62%) ÷ (11.78% – 9.62%) 358,015
Intrinsic value of Costco Wholesale Corp. common stock 393,189
 
Intrinsic value of Costco Wholesale Corp. common stock (per share) $886.55
Current share price $729.18

Based on: 10-K (reporting date: 2023-09-03).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.86%
Expected rate of return on market portfolio2 E(RM) 13.52%
Systematic risk of Costco Wholesale Corp. common stock βCOST 0.80
 
Required rate of return on Costco Wholesale Corp. common stock3 rCOST 11.78%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rCOST = RF + βCOST [E(RM) – RF]
= 4.86% + 0.80 [13.52% – 4.86%]
= 11.78%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Costco Wholesale Corp., PRAT model

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Average Sep 3, 2023 Aug 28, 2022 Aug 29, 2021 Aug 30, 2020 Sep 1, 2019 Sep 2, 2018
Selected Financial Data (US$ in millions)
Cash dividends declared 1,698 1,498 5,748 1,193 1,057 939
Net income attributable to Costco 6,292 5,844 5,007 4,002 3,659 3,134
Net sales 237,710 222,730 192,052 163,220 149,351 138,434
Total assets 68,994 64,166 59,268 55,556 45,400 40,830
Total Costco stockholders’ equity 25,058 20,642 17,564 18,284 15,243 12,799
Financial Ratios
Retention rate1 0.73 0.74 -0.15 0.70 0.71 0.70
Profit margin2 2.65% 2.62% 2.61% 2.45% 2.45% 2.26%
Asset turnover3 3.45 3.47 3.24 2.94 3.29 3.39
Financial leverage4 2.75 3.11 3.37 3.04 2.98 3.19
Averages
Retention rate 0.72
Profit margin 2.51%
Asset turnover 3.37
Financial leverage 3.07
 
FCFE growth rate (g)5 18.62%

Based on: 10-K (reporting date: 2023-09-03), 10-K (reporting date: 2022-08-28), 10-K (reporting date: 2021-08-29), 10-K (reporting date: 2020-08-30), 10-K (reporting date: 2019-09-01), 10-K (reporting date: 2018-09-02).

2023 Calculations

1 Retention rate = (Net income attributable to Costco – Cash dividends declared) ÷ Net income attributable to Costco
= (6,292 – 1,698) ÷ 6,292
= 0.73

2 Profit margin = 100 × Net income attributable to Costco ÷ Net sales
= 100 × 6,292 ÷ 237,710
= 2.65%

3 Asset turnover = Net sales ÷ Total assets
= 237,710 ÷ 68,994
= 3.45

4 Financial leverage = Total assets ÷ Total Costco stockholders’ equity
= 68,994 ÷ 25,058
= 2.75

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.72 × 2.51% × 3.37 × 3.07
= 18.62%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (323,394 × 11.78% – 6,361) ÷ (323,394 + 6,361)
= 9.62%

where:
Equity market value0 = current market value of Costco Wholesale Corp. common stock (US$ in millions)
FCFE0 = the last year Costco Wholesale Corp. free cash flow to equity (US$ in millions)
r = required rate of return on Costco Wholesale Corp. common stock

FCFE growth rate (g) forecast

Costco Wholesale Corp., H-model

Microsoft Excel
Year Value gt
1 g1 18.62%
2 g2 16.37%
3 g3 14.12%
4 g4 11.87%
5 and thereafter g5 9.62%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 18.62% + (9.62% – 18.62%) × (2 – 1) ÷ (5 – 1)
= 16.37%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 18.62% + (9.62% – 18.62%) × (3 – 1) ÷ (5 – 1)
= 14.12%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 18.62% + (9.62% – 18.62%) × (4 – 1) ÷ (5 – 1)
= 11.87%