Retail Stocks

Costco Wholesale Corp Valuation – September 2017 $COST

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Undervalued Stocks for the Enterprising Investor – August 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Costco Wholesale Corp (COST) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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).

COST Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of COST – September 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $69,797,743,701 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.81 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 102.66% Pass
6. Moderate PEmg Ratio PEmg < 20 29.20 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 7.09 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.81 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -0.68 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $5.45
MG Growth Estimate 6.55%
MG Value $117.69
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $79.03
MG Value based on 0% Growth $46.33
Market Implied Growth Rate 10.35%
Current Price $159.14
% of Intrinsic Value 135.22%

Costco Wholesale Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the  low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $3.79 in 2013 to an estimated $5.45 for 2017.  This level of demonstrated earnings growth does not support the market’s implied estimate of 10.35% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Costco Wholesale Corporation revealed the company was trading above its Graham Number of $61.46.  The company pays a dividend of $1.7 per share, for a yield of 1.1%  Its PEmg (price over earnings per share – ModernGraham) was 29.2, which was below the industry average of 48.5, which by some methods of valuation makes it one of the most undervalued stocks in its industry.  Finally, the company was trading above its Net Current Asset Value (NCAV) of $-19.22.

Costco Wholesale Corporation scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$19.22
Graham Number $61.46
PEmg 29.20
Current Ratio 0.81
PB Ratio 7.09
Current Dividend $1.70
Dividend Yield 1.07%
Number of Consecutive Years of Dividend Growth 13

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Most Recent Balance Sheet Figures

Balance Sheet Information 5/1/2017
Total Current Assets $17,256,000,000
Total Current Liabilities $21,394,000,000
Long-Term Debt $2,821,000,000
Total Assets $35,631,000,000
Intangible Assets $0
Total Liabilities $25,733,000,000
Shares Outstanding (Diluted Average) 441,056,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.08
Aug2016 $5.33
Aug2015 $5.37
Aug2014 $4.65
Aug2013 $4.63
Aug2012 $3.89
Aug2011 $3.30
Aug2010 $2.92
Aug2009 $2.47
Aug2008 $2.89
Aug2007 $2.37
Aug2006 $2.30
Aug2005 $2.18
Aug2004 $1.85
Aug2003 $1.53
Aug2002 $1.48
Aug2001 $1.29
Aug2000 $1.35
Aug1999 $0.87
Aug1998 $1.02
Aug1997 $0.74

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.45
Aug2016 $5.02
Aug2015 $4.69
Aug2014 $4.20
Aug2013 $3.79
Aug2012 $3.28
Aug2011 $2.92
Aug2010 $2.68
Aug2009 $2.52
Aug2008 $2.47
Aug2007 $2.19
Aug2006 $2.02
Aug2005 $1.81
Aug2004 $1.58
Aug2003 $1.40
Aug2002 $1.29
Aug2001 $1.15

Recommended Reading:

Other ModernGraham posts about the company

58 Companies in the Spotlight This Week – 1/31/15
Costco Wholesale Corporation Annual Valuation – 2015 $COST
14 Companies in the Spotlight This Week – 1/18/14
ModernGraham Valuation: Costco Wholesale Corp (COST)

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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