Costco Wholesale Corporation

Transcription

1 Grade Earnings Last Earnings Release 10/06/2017 Last Qtr. Actual vs. Est. $2.08 / $2.02 Next Release 10/11/2017 $2.02 Year Ending 08/31/2017 $5.92 Quick Facts Dividend Yield 1.12% 52 Wk High $ Wk Low $ Short Interest 0% of float $ /15/2017 Rated 'BUY' since Oct 26th, 2017, when it was upgraded from 'HOLD' Year Ending 08/31/2018 $6.54 Market Cap $73.9B Overview Company Performs Well In Fundamental Analysis MarketGrader currently has a BUY rating on Costco Wholesale Corporation (COST), based on a final overall grade of scored by the company's fundamental analysis. scores at the 88th percentile among all 5814 North American equities currently followed by MarketGrader. Our present rating dates to October 26, 2017, when it was upgraded from a HOLD. Relative to the Discount Stores sub-industry, which is comprised of 11 companies, Costco Wholesale Corporation's grade of ranks fourth. The industry grade leader is Five Below, Inc. (FIVE) with an overall grade of Relative to recent market conditions the stock has performed poorly in the last six months, up 0.37% compared to 9.25% for the S&P 500 Index while better than the Discount Stores sub-industry, down 0.26%. Please go to pages two and three of this report for a complete breakdown of COST's fundamental analysis. Price, Rating and Sentiment History - 2 Years 1

2 Growth B+ The Company's Recent Reports Reflect Solid Top and Bottom Line Growth, which reported $42.30 billion in total Market Growth LT B- revenue last quarter, appears poised to reverse a trend of anemic long term sales growth following its most recent results. This latest report Market Growth ST A+ represents a remarkable 58.02% increase from its total sales of $26.77 EPS Growth A+ billion recorded during the same quarter last year. In comparison, the $ billion in revenue booked by the company during the last 12 Growth Potential A+ months represents only a 25.88% increase from the $ billion booked in the same period ended three years ago. This makes next Earnings Momentum D quarter's report very important to help investors determine if the latest jump was attributed to a one-time gain or if it represents the beginning of Earnings Surprise C a positive growth trend. Profits grew very strongly last quarter compared to a year ago while full year net income showed healthy gains from three years before. Its net income rose 68.62% to $ million in its most recent quarter from $ million (excluding extraordinary items) in the year earlier period, while full year profit for the 12 months ended on August 31, 2017 of $2.94 billion was 49.85% higher than full year net of $1.96 billion reported three years earlier. The company is showing accelerating margin growth over the last three quarters, an important trend for future earnings growth. Its average growth in EBITDA, operating and net margins in its latest year-over-year quarterly comparison was 6.48%. The company's positive earnings surprise on October 06, 2017, 2.97% above the consensus view, failed to excite investors as the stock fell -7.46% following the announcement, suggesting the report offered poor guidance for future quarters. This latest earnings report wasn't enough to reverse a negative earnings surprise trend; it has failed to meet analysts' estimates by an average of -0.20% in the last six quarters it has reported, despite this positive report. Revenue Qtrly. 08/31/2017 $42.3B Revenue Qtrly. Year Ago $36.6B Revenue 1 Yr. Chg. 15.7% Revenue 12 Mo. Tr. Latest $135.8B Revenue 12 Mo. Tr. 3Y Ago $112.6B Revenue 12 Mo. Tr. 3Y Chg % Net Income Qtrly. 08/31/2017 $919M Net Income Qtrly. Year Ago $779M Net Income 1 Yr. Chg % Net Income 12 Mo. Tr. Latest $2.9B Net Income 12 Mo. Tr. 3Y Ago $2.1B Net Income 12 Mo. Tr. 3Y Chg. 43% Value B Assuming the Company's Fundamentals Don't Deteriorate in Coming Quarters, the Stock's Valuation is Acceptable at this Level Currently trading at times 12-month' earnings per share, Costco Capital Structure B- Wholesale Corporation's stock is too expensive relative to our "optimum" P/E ratio of 18.45, which is based on the company's five year EPS growth P/E Analysis D rate. In order to calculate it, MarketGrader looks at the company's Price/Book Ratio A- quarterly earnings in 12-month rolling periods; by this measure Costco Wholesale Corporation's earnings per share have grown at an annualized Price/Cash Flow Ratio A- rate of 15.50% in the last five years. The combination of a high EPS growth rate with an apparent margin expansion could translate into future Price/Sales Ratio B price gains assuming the company's overall Profitability grade improves; otherwise the company could be sacrificing financial performance for the Market Value B+ sake of growth. The stock's forward P/E of 26.34, based on the next four quarters' estimates, is higher than its trailing P/E and the S&P 500's forward P/E of It would seem therefore that investors's growth expectations may already be factored into the stock price despite the company's positive fundamentals. Investors are currently valuing 's shares at times their tangible book value (which excludes intangible assets such as goodwill), a relatively healthy valuation. When the company's intangible assets, which represent a modest 5.71% of stockholders' equity, are added back to the rest of its assets, the stock's price to book ratio drops to Relative to the $13.75 in cash flow per share generated by the company in the last twelve months, the stock is attractively priced at times cash flow per share considering its strengths across our fundamental indicators. Its shares also trade at 0.54 times its trailing 12-month sales, a small -8.55% discount to the Discount Stores industry average price to sales ratio of Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. Based on this measure 's $73.85 billion market cap is an acceptable valuation, representing a modest multiple of times its latest quarterly net income plus depreciation. P/E Ratio 12 Mo. Tr. 08/31/ Optimum P/E Ratio Forward P/E Ratio S&P 500 Forward P/E Ratio Price to (Tangible) Book Ratio 7.33 Price-to-Cash Flow Ratio Price/Sales Ratio

3 Profitability B- Company's Profitability Grades Reflect Mixed Results and Should Be Watched Closely in Coming Quarters 's overall profitability grade is pretty weak Asset Utilization B and the category's underlying indicators reveal significant weaknesses despite a very strong return on equity based on trailing 12-month results. Capital Utilization A- While the company booked profits of $2.94 billion in the last four quarters Operating Margins D combined, this accounted for only 2.17% of total sales, a very thin net profit margin, echoing its operating margin, which in the same period Relative Margins F trailed the industry average. Considering such poor results, its high return on equity is more a result of the company having little common equity in Return on Equity A- its balance sheet rather than producing strong results from operations. The Discount Stores industry's average operating margin of 8.34% is Quality of Revenues B % higher than the company's 3.28% margin. Costco Wholesale Corporation's return on equity--an important measure used by MarketGrader to gauge management efficiency--is very strong, at 27.31% based on how much the company has earned in the last year. This represents an improvement from the year-earlier 20.06% return on equity, a very healthy sign of profitable growth. In light of the company's strong performance its capital structure might be too conservative, with total at only two thirds its total equity. Its long term debt accounts for only 39.19% of total capital. 's core earnings in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA for the most recent period was $6.02 billion, or 23.16% above the $4.89 billion earned from its core operations in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are nevertheless accounted for in other parts of our analysis that look at EPS gains and net income. Cash Flow B+ Company's Management of its Cash Flow Appears Very Sound but Could Improve in a Few Areas 's cash flow fell slightly during the last Cash Flow Growth F quarter to $1.83 billion from $1.86 billion a year earlier, a 1.34% decline. What's more important and worth highlighting is the fact that up to the EBIDTA Margin D most recent quarter the company's twelve month trailing cash flow was Debt/Cash Flow Ratio A+ growing very healthily, up 23.08% compared to the same period ended a year before. This marks a sharp slowdown in the company's business Interest Cov. Capacity A+ environment and is likely to put considerable pressure on its margins. The company's net debt to EBITDA ratio jumped from 0.78 a year ago to 0.66 Economic Value A in the latest reported quarter, based on net debt (total debt minus cash on hand) of $1.26 billion and EBITDA of $1.91 billion. While the increase Retention Rate A+ from the year before was pretty significant, the current ratio is still very low and suggests the company is managing its leverage appropriately and could easily pay off its debt with the cash it has on hand and what it generates from operations. During the same period Costco Wholesale Corporation's total debt went from accounting for 30.77% of its total capital to 39.51% in its latest quarter, while its cash on hand fell by 4.02%. Unless it begins generating a larger cash flow from operations, all this increased leverage may start hindering future growth and further erode the company's profitability. An important indicator of management efficiency used by MarketGrader is Economic Value Added, or EVA, which measures each company's true return to shareholders after accounting not only for the cost of running the business (operating costs) but also the cost of the capital it employs. By measuring the real cost of capital, both equity and debt, EVA measures the creation of true economic profit. In this case had $17.72 billion in invested capital in its most recent quarter, a combination of both equity and long term debt. However, the company's weighted cost of equity of 5.04% is much larger than the weighted cost of debt, which is 0.53%. When combined, the two result in a total cost of capital of 5.57%, quite low compared to the company's total return on invested capital of 25.15% based on 12-month trailing operating income. The result is an excellent economic value added of 19.58%, a very high return to investors after all capital costs are covered. The company recently reiterated its cent a share dividend payout in its August 31, 2017 earnings report, which results in a 1.12% yield at the stock's current price. initiated its dividend payments at least 0 years ago. During the last 12 months paid out $3.90 billion in common dividends, or 64.38% of its cash flow and % of after-tax earnings. This payout was significantly larger than the 30.75% of earnings it paid out when looking at the 12 months ended the prior quarter. Even though its fundamentals are generally positive, if its dividend payments continue to grow this quickly relative to income, the company risks eroding its liquidity and straining its balance sheet. Cash Flow Qtrly. 08/31/2017 $1.8B Cash Flow Qtrly Year Ago ($169M) Cash Flow 1 Yr. Chg % Cash Flow 12 Mo. Tr. Latest $6.1B Cash Flow 12 Mo. Tr. 3Y Ago $4B Cash Flow 12 Mo. Tr. 3Y Chg % Free Cash Flow Last Qtr. $1.1B Economic Value Total Invested Capital $17.8B Return on Inv. Capital 25.15% Weighted Cost of Equity 5.04% Weighted Cost of Debt 0.53% Total Cost of Capital 5.57% Economic Value Added 19.58% 3

4 Profile Costco Wholesale Corp. operates membership warehouses based on the concept that offering members low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories. It operates warehouses in the United States, Canada, the United Kingdom, Japan and Australia and through majority-owned subsidiaries in Taiwan and Korea, and its Costco Mexico joint venture. The warehouses are designed to help small-to-medium-sized businesses to reduce costs in purchasing for resale and for everyday business use. Costco's warehouses present exclusive product category selections to be found under a single roof, which include groceries, candy, appliances, television and media, automotive supplies, toys, hardware, sporting goods, jewelry, watches, cameras, books, apparel, health and beauty aids, tobacco, furniture, office supplies and office equipment. It also offers private label Kirkland Signature products, which include juices, cookies, coffee, tires, housewares, luggage, appliances, clothing and detergent. The company also operates self-service gasoline stations at a number of its U.S. and Canadian locations and offers three types of membership: Business, Gold Star and the Executive membership. It changed its name form Costco Cos., Inc. to Costco Wholesale Corp. on August 30, The company was founded in 1983 by James D. Sinegal and Jeffrey H. Brotman and is headquartered in Issaquah, WA. Key Facts: 999 Lake Drive Issaquah,WA Phone: Biggest Company in Sub-Industry Wal-Mart Stores, Inc. (WMT) Grade 48.8 Market Cap:$ billion Smallest Company in Sub-Industry Fred's, Inc. Class A (FRED) Grade 18.3 Market Cap:$ million MarketGrader Dilution Analysis Impact of Change in Shares on EPS - Q Dilution Summary Income Statement Last Qtr (08/2017) 12 Mo. Trailing Revenue $42.3B $135.8B *EPS Latest $2.08 *EPS Year Ago $1.24 EPS Change 1 Yr. 69% C. Shares - Latest(M) 441 C. Shares - Yr Ago(M) 441 C. Shares - 1Yr Chg. 0% EPS if Yr. Ago Shares $2.08 EPS Chg. if Yr. Ago 69% EPS Loss from Dilution $0.00 *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Op. Income $1.4B $4.5B Net Income $919M $2.9B *EPS $ *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Balance Sheet Total Assets Total Debt Latest $36.3B $7.0B Stockholders Eq. $10.8B All numbers in millions except EPS Total Assets $36.3B Intangible Assets $615M Long Term Debt $6.9B Total Debt $7.0B Book Value $10.8B Enterprise Value $1.3B '12 '13 '14 '15 '16 '17 Qtr Qtr Qtr Qtr Ratios Price/Earnings (12 mo. trailing) Price/Tangible Book 7.33 Price/Cash Flow Price/Sales 0.54 Debt/Cash Flow Return on Equity 27.31% Gross Margin (12 mo. trailing) 13.25% Operating Margin (12 mo. trailing) 3.28% Net Profit Margin (12 mo. trailing) 2.17% 4

5 Top Down Analysis Consumer Discretionary Stocks in Sector: 670 Buys: 123 (18.36%) Holds: 128 (19.10%) Sells: 419 (62.54%) No. of stocks at: 52-Wk. High: Wk. Low: 37 Above 50 & 200-day MA: 270 Below 50 & 200-day MA: 255 Discount Stores Stocks in Sub-Industry: 11 Buys: 4 (36.36%) Holds: 3 (27.27%) Sells: 4 (36.36%) No. of stocks at: 52-Wk. High: 3 52-Wk. Low: 1 Above 50 & 200-day MA: 8 Below 50 & 200-day MA: 3 # Ticker Grade Sentiment Name Price Next EPS 1 EVC N Entravision Communications Corporation $ /09/ ITRN N Ituran Location & Control Ltd. $ /11/ NTRI N Nutrisystem, Inc. $ /08/ THO P Thor Industries, Inc. $ /04/ MAR P Marriott International, Inc. Class A $ /14/ TSG N Stars Group Inc. $ /13/ LGIH N LGI Homes, Inc. $ /06/ ELY N Callaway Golf Company $ /01/ NVR P NVR, Inc. $3, /23/ SWK P Stanley Black & Decker, Inc. $ /26/ COST 4 N $ /11/2017 # Ticker Grade Sentiment Name Price Next EPS 1 FIVE N Five Below, Inc. $ /01/ TGT P Target Corporation $ /22/ BIG N Big Lots, Inc. $ /01/ COST 4 N $ /11/ DLTR N Dollar Tree, Inc. $ /25/ DG P Dollar General Corporation $ /07/ DOL.CA P Dollarama Inc. $ /13/ WMT P Wal-Mart Stores, Inc. $ /16/ PSMT N PriceSmart, Inc. $ /05/ FRED N Fred's, Inc. Class A $ /08/ Price Trend. A- 2. Price Momentum. B- 3. Earnings Guidance. B- 4. Short Interest. N/A 5.6 Copyright 2010 MarketGrader.com Corp. All rights reserved. Any unauthorized use or disclosure is prohibited. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. MarketGrader does not make markets in any of the securities mentioned in this report. MarketGrader does not have any investment banking relationships. MarketGrader and its employees may have long/short positions or holdings in the securities or other related investments of companies mentioned herein. Officers or Directors of MarketGrader.com Corp. are not employees of covered companies. MarketGrader or any of its employees do not own shares equal to one percent or more of the company in this report. 5