Case Study

Investment Rating

BUY

Pricing

Closing Price​(10/11/05)​$45.49

52-Week High​$50.46

52-Week Low​$39.48

Valuation

FY EPS ​P/E

2003​5.35​17.2

2004​6.57​11.3

TTM​7.18​12.5

2005E​-----​11.8

Profitability & Effectiveness (5 yr)

ROA​5.99%

ROE​12.51%​

Profit Margin​1.96%

ROCI​%​

Market Data

Total Assets (000)​

Volume​

Market Cap (B)​21.87

Avg Vol (000)​3,017,520

EPS​2.07

P/E​22.07

Div & Yield​0.46(1.00%)

Alex Arnote

Ahae5d@mizzou.edu

Costco Wholesale Corporation (Costco)

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, Costco’s 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.

Growth Dynamics

Costco’s 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.

Revenue Est.

Current Quarter

Next Quarter

Current Year

Next Year

Avg. Estimate

12.78B

13.85B

58.7B

63.95B

No. of An.

11

11

13

11

Low Estimate

12.46B

13.39B

57.17B

61.13B

High Estimate

13.07B

14.07B

60.53B

66.28B

Year Ago Sales

11.58B

12.66B

N/A

58.74B

Sales Growth

10.4%

9.4%

N/A

8.9%

Source: finance.yahoo.com

Since a great deal of Costco’s growth comes from new store openings, growth is somewhat limited by the availability of new markets. Costco’s management has recognized this and has already begun an extensive and successful overseas expansion plan while maintaining steady domestic growth. Growth in older stores is spurred by the addition of additional services included gas stations, pharmacy, and other service oriented enterprises.

Earnings per share (MorningStar.com)

II. Executive Summary

Costco is an international discount retailer with 415 retail locations in six countries and thirty seven states. Small business owners and professionals in the $100k salary range are the primary customers due to their disposable incomes and demand for high-end goods/services. The increased demand for designer goods has led to increased sales of designer home furnishings including furniture and accessories.

Day to day office and home supplies, from paper to flour provide the economic saving of bulk buying and bring customers in who can then make high dollar impulse buys generating one of the highest dollars per square foot.

Low volatility and consistent growth combined with excellent leadership and corporate policy make Costco an excellent stock for long term investing.

Recommendation: BUY

Costco is a buy for anyone who wants a low risk stock that will outperform the market and wants long term stability with excellent growth and consistent dividends.

Target Price: ~ $45 the going market rate

Pros

​-Highest sales/profit per square foot in the industry

​-Lowest labor costs in the industry

​-Steady/consistent growth

​-Low risk

-Better than market returns

​-Everybody

...