Is Costco Undervalued?

by Trefis Team
-4.54%
Downside
313
Market
299
Trefis
COST
Costco
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No, Costco (NASDAQ: COST) doesn’t look undervalued. As per Trefis, the price estimate of Costco’s stock is $299, which is similar to its current market price.

Costco, a US-based company, operates membership warehouses based on the concept of offering the members low prices on a limited selection of nationally branded and private-label products in a wide range of categories. In recently ended FY 2019 (ended August 2019), the company reported Total revenue of $152.7 billion, up 7.8% y-o-y. Earnings were recorded at $8.37, up from $7.09 in the previous year. For more details regarding the previous earnings please check Costco’s Earnings.

Trefis has a price estimate of $299 for Costco’s stock. We have detailed the key components of Costco’s Valuation in an interactive dashboard, along with our forecast for the full year 2020.

#1 Estimating Costco’s Revenues

  • Total Revenue has seen a constant increase over the years from $118.7 billion in FY 2016 to $152.7 billion in FY 2019. Trefis estimates Total revenue to reach around $163.6 billion in FY 2020 (ended August 2020).
  • Costco US is the highest contributor to Total revenues and has a good growth over recent years. It grew from $72 billion in FY 2016 to $87.9 billion in FY 2019. Trefis estimates revenue to be $94.1 billion for FY 2020 (ended August 2020).
  • Revenue from Costco International has seen a steady growth over recent years. It grew from $26.7 billion in FY 2016 to $32.9 billion in FY 2019. Trefis estimates revenue to be $35.1 billion for FY 2020 (ended August 2020).
  • Ancillary Business revenue has seen high growth over recent years. It grew from $17.4 billion in FY 2016 to $28.6 billion in FY 2019. Trefis estimates revenue to be $30.9 billion for FY 2020 (ended August 2020).
  • Revenue from Membership fees has seen a steady growth over the years. It grew from $2.6 billion in FY 2016 to $3.4 billion in FY 2019. Trefis estimates revenue to be $3.5 billion for FY 2020 (ended August 2020).

#2 Estimating Costco’s Net Income

  • The company has seen a continuous increase in Net Income margins over the last few years. Trefis estimates the margin to be around 2.3% for FY 2020 (ended August 2020).

#3 Deriving Costco’s EPS Figure

  • Costco has regularly invested in share repurchases to boost shareholder returns. Shares outstanding are likely to be around 437.3 million at the end of 2020.
  • This would enable it to report an EPS figure of $8.76 in 2020.

#4 Estimating Costco’s Share Price using P/E multiple

  • We expect Costco to achieve earnings of $8.76, which coupled with our P/E multiple of 34.1x works out to a price estimate of $299.

 

 

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