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I. Investment Highlights
Company Profile
Costco is a low cost/discount retailer that operates through
417 warehouse style retail stores, and through Costco.com.
Access to Costco Warehouses is restricted to members who
pay a small annual fee for access. Started primarily as a
small business supply company, Costcos inventory focus has
grown to include high-end consumer goods including home
electronics and luxury items. Costco has succeeded by
focusing on the demands a specific customer group while
continues to provided for other profitable customers.
Pricing
Closing Price (10/11/05) $45.49
52-Week High
$50.46
52-Week Low$39.48
Valuation
FY
2003
2004
TTM
2005E
EPS
5.35
6.57
7.18
-----
P/E
17.2
11.3
12.5
11.8
Growth Dynamics
Costcos quarterly sales growth is in tune with the rest of the
industry at ~ 10%. This is a very sustainable growth rate and
while not stellar, when combined with the lowest labor costs
in the industry, results in an excellent return.
Market Data
Revenue Est.
Current
Total Assets (000)
Quarter
Volume
Avg. Estimate 12.78B
Market Cap No.
(B) of An. 21.87 11
Avg Vol (000)3,017,520
Low Estimate 12.46B
EPS
2.07
High Estimate
13.07B
P/E
22.07
Year Ago
11.58B
Div & Yield
0.46(1.00%)
Next
Quarter
13.85B
11
13.39B
14.07B
12.66B
Current
Year
58.7B
13
57.17B
60.53B
N/A
Next Year
9.4%
N/A
8.9%
Sales
Sales Growth
10.4%
63.95B
11
61.13B
66.28B
58.74B
Source: finance.yahoo.com
Alex Arnote
Ahae5d@mizzou.edu
very reasonable level. Products are high quality and the return policy is very customer
friendly. Lastly, a great deal of the inventory at Costco has inconsistent availability.
Products often sell out and may never be there again, this low availability combined with
low prices and high quality dramatically increase impulse buying, particularly of high
cost items.
Competition
Two major chains, Costco and Sams Club, a Wal-Mart Division, dominate the United
States warehouse wholesale market. BJs Wholesale Club is a regional player, located
only on the Atlantic seaboard of the US. Overseas there are many smaller competitors,
but most are focused on food and not retail merchandise.
Market Cap:
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Oper Margins (ttm):
Net Income (ttm):
Price/Book Value
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
COST
21.87B
10.10%
51.37B
1.96%
1.97B
2.89%
1.01B
2.47
2.07
22.07
1.61
0.43
WMT
185.57B
10.20%
298.46B
23.06%
22.39B
5.94%
10.72B
3.85
2.536
17.00
1.03
0.60
BJ
1.78B
9.8%
7.68B
1.55%
104.22M
2.52%
121.41M
1.91
1.71
15.2
1.05
0.23
Industry
TGT
46.2B
291B
13.6%
10.0
49.57B
NA
4.82%
3.4%
5.28B
NA
7.92%
NA
10.72B
NA
3.45
3.4
2.536
2.66
19.62
18.4
1.03
291B
0.60
10.0
V. Company Position
Market Information
Costco operates in 6 countries and 37 states. Regions with a large number of small
business owners and/or higher income professionals with a demand for high-end goods
are typical.
large stakes in the companies they run since it gives them a stake in the success of the
company in the long run.
VI. Financial Statement Analysis
Financial Ratios
Trend Analysis (Costco vs. S&P 500)
Looking at the year to date chart for price changes we see that the S&P 500 has
outperformed Costco. However, when looking at the 5 year chart below, we see a very
different picture.
Market Cap:
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Oper Margins (ttm):
Net Income (ttm):
Price/Book Value
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
COST
21.87B
10.10%
51.37B
1.96%
1.97B
2.89%
1.01B
2.47
2.07
22.07
1.61
0.43
WMT
185.57B
10.20%
298.46B
23.06%
22.39B
5.94%
10.72B
3.85
2.536
17.00
1.03
0.60
BJ
1.78B
9.8%
7.68B
1.55%
104.22M
2.52%
121.41M
1.91
1.71
15.2
1.05
0.23
Industry
TGT
46.2B
291B
13.6%
10.0
49.57B
NA
4.82%
3.4%
5.28B
NA
7.92%
NA
10.72B
NA
3.45
3.4
2.536
2.66
19.62
18.4
1.03
1.15
0.60
0.94
As we see here, Costco is outperforming its competitors, its industry, and the market as a
whole.
VII. Financial Forecasts (from analysts)
Avg. Revenue forecasts (from finance.yahoo.com)
Earnings estimate (next quarter Feb. 2006)
Revenue estimate (next quarter Feb. 2006)
$0.60
$13.83B
7
9.5%
EPS trends
Earnings Trends
Current Estimate
7 days ago
30 days ago
60 days ago
90 days ago
Source: finance.yahoo.com
Current Quarter
$0.44
0.44
0.44
0.44
0.44
Next Quarter
$0.60
0.61
0.61
0.61
0.61
Current Year
$2.29
2.29
2.28
2.30
2.30
Next Year
$2.59
2.62
2.62
2.65
2.65
There appears to be very little variation of the analysts opinions over the course of three
month. This seems to indicative a level of stability and openness of the company.
Growth Estimates and Trend Analysis
Source: finance.yahoo.com
Growth Estimates
Current Qtr.
Next Qtr.
This Year
Next Year
Past 5 Years (per
annum)
Next 5 Years (per
annum)
Price/Earnings (avg. for
comparison categories)
COST
10.0%
11.1%
12.3%
13.1%
Industry
15.5%
14.6%
13.0%
15.9%
11.3% N/A
S&P 500
17.90%
16.10%
14.50%
11.50%
N/A
12.00%
14.72%
10.58%
19.3
18.53
1.49
Currently Costcos growth estimate for this quarter is 10.0%. Compared to the industry
and the S&P 500, this is significantly lower. The estimate for next few years shows
Costco increasing its growth rate to a level similar to the industry. It should also be noted
that Costcos Industry includes many companies that have very different business
models, making comparison difficult.
VIII. Analysis of Risk
From an actual risk standpoint, Costco is not expected to have financial problems
anytime in the near future. Morningstar has given it an A rating for financial health and I
see few problems, barring a major collapse in the US economy, on the horizon.
Costco is traded on the NASDQ Stock Exchange as ticker symbol COST. During the
last three months the average trading number of shares traded was 3,017,520 shares daily.
During the last 12 months the low share price was $39.48 and the high was $50.46.
The standard deviation, or relative risk, was measured at approximately 3.83 with a
correlation of 0.627(see chart below). The Beta is 0.84
Marketability
a. Trading Location NASDQ
b. Average Daily Volume (13 wk) 3,017,520
Total Risk
c. Range 52 week range $39.48 $50.46
Close
43.09
43.4
45.97
44.73
45.38
40.63
44.18
46.59
47.27
48.41
48.6
47.94
41.51
Market
1237.91
1220.33
1234.18
1191.33
1191.5
1156.85
1180.59
1203.6
1181.27
1211.92
1173.82
1130.2
1114.58
2-Aug-04
1-Jul-04
1-Jun-04
3-May-04
1-Apr-04
1-Mar-04
2-Feb-04
2-Jan-04
41.17
40.71
41.18
37.9
37.5
37.61
38.86
36.94
1104.24
1101.72
1140.84
1120.68
1107.3
1126.21
1144.94
1131.13
Mean:
42.83667
1162.15
StDev
Mrkt. Corr.
3.831115
0.627443
45.49
21,810,000,000
0.84
7.180
0.46
22.01
1.00%
14%
10
9.6%
12.45%
8.30%
Relationship
SINEGAL, JAMES D.
Shares
Reported
CEO
655,674
6-June-05
Chairman
162,475
11-Mar-05
152,902
26-apr-05
DICERCHIO, RICHARD D
107,408
1-Nov-04
BROTMAN, JEFFREY H
Shares
% Out
Value*
Reported
40,624,076
8.48
$1,794,771,677
31-Mar-05
34,560,690
7.21
$1,526,891,284
31-Mar-05
Shares
% Out
Value*
Reported
18,051,900
3.77
$853,313,313
31-Jan-05
VANGUARD/PRIMECAP FUND
7,500,000
1.57
$363,075,000
31-Dec-04
As for Benjamin Graham, it is a tough call. Given the current market, I would say that
Costcos low Price/Book ratio of 2.5 beats the industry average of 3.4 and the market
average of 3.3 so it passes.
XI. Conclusion
There are few unfavorable conclusions about Costco. The limitations on continued
growth could be problems, but the overseas expansion and controlled domestic growth
have reduced this risk. A major economic downturn would hurt the company since the
demand for luxury goods would decline, but this could be offset by increased demand for
low-cost bulk buying.
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The membership system not only an excellent source of income, but allows Costco to
know what each customer buys and to tailor the marketing and product selection
accordingly.
Recommendation
Buy. This stock will out perform the market and have a low level of risk due to the
excellent management and a specific target market that Costco serves perfectly. Steady
growth potential and success overseas will lead to excellent returns with very little actual
risk.
Disclaimer: This analysis does not necessarily reflect the beliefs of the University of
Missouri-Columbia or the College of Business. The insights and opinions are of the
students of Investment Funds Management and should not be used in personal investment
decisions. The University of Missouri and the authors of this analysis take no
responsibility for the validity of the valuation and analysis.
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Financial Resources:
Online
Yahoo Finance (finance.yahoo.com)
MSN Money (www.msn.com)
Morningstar (www.morningstar.com)
ADVFN (www.advfn.com)
Databases
Factiva
ABI/Inform
Fund Management Resources
Citigroup Inc Analysis Report
AutoZone Inc Analysis Report
Portfolio Committee Spreadsheet
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