Costco Wholesale Corp (COST) Valuation

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Company Profile (obtained from Google Finance): Costco Wholesale Corporation (Costco) operates membership warehouses-based offering its members products in a range of merchandise categories. It buys the majority of its merchandise directly from manufacturers and route it to a cross-docking consolidation point (depot) or directly to its warehouses. The Company’s depots receive container-based shipments from manufacturers and reallocate these goods for shipment to its individual warehouses, generally in less than 24 hours. The Company’s warehouse format averages approximately 140,000 square feet. Its warehouses operate on a seven-day, 69-hour week. It carries an average of approximately 4,000 active stockkeeping units (SKUs) per warehouse in its core warehouse business. Many consumable products are offered for sale in case, carton or multiple-pack quantities only. As of August 31, 2008, Costco operated 512 membership warehouses.

ModernGraham Comments: None at this time.

Defensive and Enterprising Investor Tests:

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests: Score = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary:

• Last updated 11/2/09
• MG Value = $51
• MG Opinion = Overvalued
• Value based on 3% Growth = $37
• Value based on 0% Growth = $21
• Market-implied growth rate = 7.03%
• Net Current Asset Value (NCAV) = $2.42
• Current Ratio = 1.11
• Price to Book Ratio = 2.47

Key Data:

Balance Sheet – 8/30/2009

• Current Assets    $10,337,000,000
• Current Liabilities    $9,281,000,000
• Total Debt    $2,206,000,000
• Total Assets    $21,979,000,000
• Intangible Assets    $0
• Goodwill    $0
• Total Liabilities    $11,961,000,000
• Outstanding Shares    435,970,000

Earnings Per Share – Diluted

• 2009 (estimate) – $2.47
• 2008 – $2.89
• 2007 – $2.37
• 2006 – $2.30
• 2005 – $2.18
• 2004 – $1.85
• 2003 – $1.53
• 2002 – $1.48
• 2001 – $1.29
• 2000 – $1.35
• 1999 – $1.11

Earnings Per Share – Modern Graham

• 2009 (estimate) – $2.52
• 2008 – $2.47
• 2007 – $2.19
• 2006 – $2.02
• 2005 – $1.81
• 2004 – $1.58

Valuation History:

• 11/2/09 – Value $51, Actual Price $56.85, Overvalued & Speculative
• 6/25/09 – Value $48, Actual Price $46.28,Fairly Valued & Speculative