In This Article:
Costco Wholesale (NASDAQ:COST) has had a rough time since the end of 2021. After peaking at $567.77 on Dec. 29, COST stock has tumbled to a close of $483.47 as of Jan. 26, 2022. However, investors may become interested in the stock once more. The shares look cheap again.
Source: ilzesgimene / Shutterstock.com
As a result, investors now see that, given the recent quarterly results, not everything is really as bad as it seems with Costco. Even in light of the recent market downturn.
Here’s what you should know about COST stock moving forward.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
COST Stock: Where Things Stand
On Dec. 9, Costco reported stellar fiscal first-quarter results for the period ended Nov. 21. Revenue was up 15% on a total company basis year-over-year (YOY). Moreover, the company’s online sales were up 14.3%. Even not including the volatile gasoline sales, its total revenue was up almost 10% YOY.
In addition, Costco is still very profitable. Its earnings per share (EPS) figure was up 13.7% on a YOY basis to $2.98 per share. That was an increase from $2.62 last year.
On top of this, the company’s free cash flow (FCF) is also very high. For example, the company’s latest 10-Q report shows that it produced $3.26 billion in operating cash flow. After deducting $1.06 billion in capital expenditures (capex), its FCF for the quarter was $2.2 billion.
This is important since it represents about 4.4% of its quarterly $50.36 billion in sales. On the one hand, that is good since the FCF margin is positive. But on the other hand, it is not that high of a margin. At least, it’s not high compared to technology stocks. Still, for retail comps, this is a good FCF margin.
This will help us estimate the value of COST stock.
What Costco Stock Is Worth
Analysts now forecast that, for the year ending August 2022, sales will rise more than 11% to $217.8 million, according to Yahoo! Finance. And for the year ending August 2023, they forecast sales will rise 8% to $235 billion.
Therefore, if we assume that FCF will average 5% of future sales ending August 2023, free cash flow could rise to $11.75 billion. That figure can be used to estimate the company’s future value.
For example, if we assume that the market will eventually give COST stock a 5% FCF yield, the future value for the company is $235 billion. The way we estimate this is by dividing $11.75 in future FCF by 5%. That division results in a valuation of $235 billion.
This is also the same metric as multiplying FCF by 20 times, since the inverse of 0.05 is 20 (i.e., 1 / 0.05 = 20). In other words, using a multiple of 20 to value the company’s free cash flow puts it on a value of $235 billion.