Kenya Lopez
Costco Wholesale
Corp. (NASDAQ: COST)
FIN 4370
Even
when the Discounted Cash Flow Model considers the most approachable assumptions
to account for intrinsic value, doing other type analysis as valuation multiples
would be helpful to determine how far or close we are from a previous valuation
and support a final decision.
There are different metrics one
can use for valuation multiples:
Price-Earnings
(PE): applies the mean price-earnings
ratio based on expected earnings of all traded competitors to the firm’s expected
earnings for the following years. It assumes that growth’s earnings would be
similar to the industry.
Enterprise
Value (EV) to revenue: This ratio gives investors a quantifiable measure of the company’s
value to its sales. It determines how many dollars of EV are generated for
every dollar of yearly sales. It provides a better overview of increases and
decreases in comparing other companies. However, does not consider operation
expenses.
Enterprise Value to EBITDA: (EV/ EBITDA.) EBITDA is
a more reliable measure to compare because it considers earnings before paying
for interest and taxes, and adds back amortization. This calculation is a good
proxy to determine how profitable a company is, and it would be a good measure
to compare Costco with its peers. Even though this group of peers are
retailers, they have different forms of operations, and different turnover
ratios. Some companies could be more efficient and effective in the way they
operate their businesses impacting profitability. This is the reason I am
choosing this metric to evaluate Costco with its peers.
Peers Competitors
Walmart stores (WMT) “The
company operates discount stores, supermarkets, supercenters, hypermarkets,
warehouse clubs, cash and carry stores, home improvement stores, specialty
electronics stores, apparel stores, drug stores, convenience stores, and
membership-only warehouse clubs; and retail Websites, such as walmart.com and
samsclub.com, as well as mobile commerce applications.” (yahoo finance)
Target Corporation (TGT) “Target Corporation operates as a general merchandise
retailer. It offers household essentials, including pharmacy, beauty, personal
care, baby care, cleaning, and paper products; dry grocery, dairy, frozen food,
beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and
apparel for women, men, boys, girls, toddlers, infants, and newborns, as well
as intimate apparel, jewelry, accessories, and shoes.” (Yahoo finance)
Amazon.com, Inc. (AMZN) “engages in the retail sale of consumer products and
subscriptions in North America and internationally. It operates through the
North America, International, and Amazon Web Services (AWS) segments. The company
sells merchandise and content purchased for resale from vendors, as well as
those offered by third-party sellers through retail Websites.” (Yahoo finance)
The Home Depot, Inc. (HD) “operates as a home
improvement retailer. It operates The Home Depot stores that sell various
building materials, home improvement products, and lawn and garden products, as
well as provide installation, home maintenance, and professional service
programs to do-it-yourself, do-it-for-me (DIFM), and professional customers.” (Yahoo
finance)
Methodology
For my comparable analysis I would use Enterprise Value to EBITDA (EV / EBITDA). I am taking historical enterprise value
from 2012 to 2016 and getting the average growth rate to estimate EV from 2017
to 2020. Data was obtained from stock analysis on net. (stock-analysis-on.net)
|
Figures in Millions
|
Historical
|
||||||
|
Company
|
Ticker Symbol
|
2012
|
2013
|
2014
|
2015
|
2016
|
Average Growth
|
|
Walmart
|
WMT
|
259,306
|
297,926
|
300,184
|
306,165
|
260,724
|
|
|
|
Growth
|
|
0.13
|
0.01
|
0.02
|
-0.17
|
-0.00440
|
|
Target
|
TGT
|
55,963
|
60,812
|
50,672
|
61,399
|
57,835
|
|
|
|
Growth
|
374.4
|
0.08
|
-0.20
|
0.17
|
-0.06
|
-0.00182
|
|
Amazon
|
AMZN
|
117,499
|
159,204
|
163,311
|
274,123
|
389,269
|
|
|
|
Growth
|
54354
|
0.26
|
0.03
|
0.40
|
0.30
|
0.24679
|
|
Home Depot
|
HD
|
84,477
|
111,961
|
121,480
|
162,386
|
182,559
|
|
|
|
Growth
|
19616.4
|
0.245
|
0.078
|
0.252
|
0.111
|
0.17156
|
Estimated Enterprise Value:
Figures in Millions
|
Estimate EV
|
||||
|
Company
|
Ticker Symbol
|
2017E
|
2018E
|
2019E
|
2020E
|
|
Walmart
|
WMT
|
259,681
|
258,642
|
257,608
|
256,577
|
|
|
|
|
|
|
|
|
Target
|
TGT
|
57,719
|
57,604
|
57,489
|
57,374
|
|
|
|
|
|
|
|
|
Amazon
|
AMZN
|
485,418
|
605,317
|
754,830
|
941,273
|
|
|
|
|
|
|
|
|
Home Depot
|
HD
|
213,959
|
250,760
|
293,891
|
344,440
|
The following chart shows
historical EBITDA from the years 2013 to 2016. I am using the average growth to
forecast for the years 2017 to 2020.
The following chart shows the
estimated EBITDA:
|
HISTORICAL EBITTA
|
Average Growth
|
||||||
|
Company
|
Ticker Symbol
|
|
2013
|
2014
|
2015
|
2016
|
|
|
Walmart
|
WMT
|
|
36300
|
35740
|
36320
|
33560
|
|
|
|
|
|
|
-0.01543
|
0.016228
|
-0.07599
|
-0.025
|
|
Target
|
TGT
|
|
7390
|
6220
|
6300
|
6750
|
|
|
|
|
|
|
-0.15832
|
0.012862
|
0.071429
|
-0.025
|
|
Amazon
|
AMZN
|
|
2670
|
3660
|
4500
|
8050
|
|
|
|
|
|
|
0.37079
|
0.229508
|
0.788889
|
0.463
|
|
Home Depot
|
HD
|
|
9600
|
10920
|
12290
|
13770
|
|
|
|
|
|
|
0.1375
|
0.125458
|
0.120423
|
0.128
|
|
(Figures in Millions)
|
|
||||||
I used estimated values of EV and
EBITDA to obtain the multiples for the peers’ companies. Results are as
follows:
|
Estimate EV/ EBITDA
|
|||||
|
|
|
2017E
|
2018E
|
2019E
|
2020E
|
|
Walmart
|
WMT
|
7.9x
|
8.1x
|
8.3x
|
8.5x
|
|
|
|
||||
|
Target
|
TGT
|
8.8x
|
9.0x
|
9.2x
|
9.4x
|
|
|
|
||||
|
Amazon
|
AMZN
|
41.2x
|
35.1x
|
29.9x
|
25.5x
|
|
|
|
||||
|
Home Depot
|
HD
|
13.8x
|
14.3x
|
14.9x
|
15.5x
|
|
Mean
|
|
17.9x
|
16.6x
|
15.6x
|
14.7x
|
|
Median
|
|
11.3x
|
11.6x
|
12.0x
|
12.4x
|
Valuation
I forecast enterprise value by
2020 to be $94,994.70 million or $216.59 per share. This is based on 438.59 million
shares outstanding and a mean multiple of 14.7x. In a previous DCF analysis, the
expected price per share equals $250.15. Stock price as October 18, 2017 is
$158. With EV/EBITDA the stock us undervalue by 37%, and with CDF price is
undervalue by 58%. However, not premium growth was reflected. I am including a
3% premium growth due to the actual economic conditions. With this adjustments
enterprise value increase to $97,844.5 million and price per share equals to
223.09 making the stock price to be undervalue by41%. Investors that focus on
value stocks can consider Costco as a good investment for future returns.
Implied Costco Enterprise Value (EV): in
millions
|
Costco
|
2017E
|
2018E
|
2019E
|
2020E
|
Price / Share
|
|
EBITDA
|
5,275
|
5,644
|
6,039
|
6,462
|
|
|
Mean
|
17.9x
|
16.6x
|
15.6x
|
14.7x
|
|
|
Implied EV
|
94,424.29
|
93,696.33
|
94,215.61
|
94,994.70
|
216.59
|
|
Premium for Growth Rate:
|
|
|
3%
|
|
|
Implied EV
|
97,257.02
|
96,507.22
|
97,042.08
|
97,844.54
|
|
EV/Share
|
|
|
|
223.09
|
While Discounted Cash Flow models
focus more on the intrinsic value of the company, relative valuation focus on
the value of a company based on the general market relative to its peers. One
can reconcile any difference between the results of an Intrinsic Valuation and
a relative valuation by adjusting the T-value growth, or the WACC in DCF and
with premium growth rate or private market discounts in relative valuation. In this case, I used values from 2012 to 2016
to forecast after 2017. Two of the peer companies such as Walmart and Target
have negative average growth. that
doesn’t mean that this companies can’t improve. Walmart for example has been
making huge improvements this year after investing a lot online-sales. Therefore,
we can make our adjustments in our analysis as more public information comes
out. Ultimately, using different types of valuations its better alternative. It
helps to support our analysis, it provides accuracy, and a more reliable
analysis when we look at different perspectives. Such as this analysis.
Works Cited
Target Corporation (TGT). Profile. Financials.Yahoo
Finance. Web. October 23, 2017. Retrieved
Wal-Mart Stores, Inc. (WMT). Profile. Financials. Yahoo
Finance. Web. October 23, 2017.
Retrieved from https://finance.yahoo.com/quote/WMT/profile?p=WMT
Costco Wholesale Corporation. Form 10-K. Securities
and Exchange Commission.
Web.
October 23, 2017. Retrieve from https://www.sec.gov/Archives/edgar/data/909832/000090983215000014/cost10k83015.htm#sA24EE6E3A159E6344B3CD3EF11E31FAA
Amazon (AMZN) Profile. Financials Yahoo Finance. Web. October 25,
2017. Retrieved from
The Home Depot, Inc.
(HD) Profile. Financials. Yahoo
Finance. Web. October 25, 2017.
Retrieved from https://finance.yahoo.com/quote/HD/profile?p=HD
Target Corporation (TGT)
Enterprise Value. Web. October 23, 2017. Retrieved
from https://www.stock-analysis-on.net/NYSE/Company/Wal-Mart-Stores-Inc/Valuation/Enterprise-Value#Historical-EV.
Wal-Mart Stores, Inc. (WMT). Enterprise
Value. Web. October 23, 2017. Retrieved
Amazon (AMZN)Enterprise Value. Web. October 23, 2017. Retrieved
from https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Valuation/Enterprise-Value#Historical-EV)
The Home Depot, Inc.
(HD) Enterprise Value. Web. October 23, 2017. Retrieved
from https://www.stock-analysis-on.net/NYSE/Company/Home-Depot-Inc/Valuation/Enterprise-Value#Historical-EV
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