Costco Wholesale operates membership warehouses, offering branded and private-label products in a range of merchandise categories. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers,; and engages in the travel business. The company was founded in 1976 and is based in Issaquah, Washington.
COST Price Forecast Based on DCF Valuation
DCF Fair Value Target:
We started the process of determining a valid price forecast for Costco Wholesale Corp with a discounted cash flow analysis -- the results of which can be found in the table below. To summarize, we found that Costco Wholesale Corp ranked in the 28th percentile in terms of potential gain offered. We should note, though, that all scenearios modelled for this stock suggest it is overvalued. As for the metrics that stood out in our discounted cash flow analysis of Costco Wholesale Corp, consider:
The company's debt burden, as measured by earnings divided by interest payments, is 33.05; that's higher than 91.39% of US stocks in the Consumer Defensive sector that have positive free cash flow.
The business' balance sheet suggests that 7% of the company's capital is sourced from debt; this is greater than merely 18.38% of the free cash flow producing stocks we're observing.
COST's estimated cost of debt, based largely on its market capitalization and its interest coverage ratio, is 2%; for context, that number is higher than 41.7% of tickers in our DCF set.
Terminal Growth Rate in Free Cash Flow
Return Relative to Current Share Price
TPB, EL, OLLI, PG, and CLX can be thought of as valuation peers to COST, in the sense that they are in the Consumer Defensive sector and have a similar price forecast based on DCF valuation.
The great investor Warren Buffett has said his "favorite holding period is forever." There are few companies worthy of a forever holding period. Walmart (NYSE: WMT) has a simple formula with a proven long-term success rate.
Operating as a membership-based warehouse retailer, Costco has a loyal customer base that keeps returning for its rock-bottom prices and unique product selection. Off-price leader TJX, the parent of TJ Maxx, Marshall's, and Home Goods, is also known for its bargain prices on apparel and home goods, as well as its frequently-rotating inventory, which creates a so-called treasure-hunt experience, meaning shoppers will never find the same assortment twice. Costco and TJX's approaches have made each company relatively protected from e-commerce competitors like Amazon, and they continue to open new stores.