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Margarita Torres had just completed her analysis of Costco’s financial performance over the previous five years. She had concluded that the company grown at a manageable rate. From an investment standpoint she was concerned about the future performance of the business. As an experienced investor, she knew that there were two components of judging the value of her stock holdings : the future performance of the business an the potential for continued returns from the current price level.

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502 views4 pages

Paper Costco

Margarita Torres had just completed her analysis of Costco’s financial performance over the previous five years. She had concluded that the company grown at a manageable rate. From an investment standpoint she was concerned about the future performance of the business. As an experienced investor, she knew that there were two components of judging the value of her stock holdings : the future performance of the business an the potential for continued returns from the current price level.

Uploaded by

Dhe Sagala
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Costco Wholesale Corporation Financial Statement Analysis (B)

Margarita Torres had just completed her analysis of Costcos financial


performance over the previous five years. She had concluded that the
company grown at a manageable rate. From an investment standpoint she
was concerned about the future performance of the business. As an
experienced investor, she knew that there were two components of judging
the value of her stock holdings : the future performance of the business an
the potential for continued returns from the current price level.
Margarita Torres make make the judge through these steps:
Financial Forecast for Costco
Identification the growth drivers of Costco
Forecast Financial Statement
Valuation with discounted cash flow model
The update data about the stock of Costco that represent a positive
growth. The stock price on 27th May, 2011 is $ 81.53 1

These are the answers of the question :


1.

How appropriate are the five factors that Torres chooses to determine
the future performances of Costco?
a.
Number of warehouse
Costco located warehouse in areas with a population of around
500.000 in a 15-mile radius, and it is showed that the warehouse
is located in high density population. And based on the data we
calculated that from 30% market share there was personal
consumption only $ 666 per Costcos warehouse. If we compare
to Personal Income Consumption from US Bureau of Economic
Analysis in year 2000 about $ 24.534, it is appropriate to include

www.nyse.com

b.
c.

d.

e.

this factor to determine the future performance of Costco. In


that population we could build more warehouse
Sales per store
By increasing number of warehouse about 10% we assumed we
could increase net sales about 10%.
Membership base
Membership base is one way to maintain the relation with
Costcos customers. From the membership base we can inidicate
the loyalty of the customers. With the addition of so many new
stores to the corporation, it is unfair to assume that from
inception they are as capable as old stores of achieving the
same level of high performance, especially since it takes a while
to gain new members for whom the savings outweigh the cost of
the required annual membership fee.
Operating margins
Operating profits represent the margin earned from producing
and selling products, this amount does not consider financial
and tax cost. Operating margin is a measurement of what
proportion of companys revenue is left over after paying for
variable cost of production such as wages, raw materials, etc. 2
From this factor we can determine the quality of a company, to
look at the change in operating margin over time and to
compare the companys yearly.
International expansion
Through international expansion is expected to provide positive
growth for operatin income and market share

2.

What other relevant factors might be included iin a forecast of the


business? To what extent are they covered in the factors above?
Besides the five factors, we add others relevant factors that could
address qualitative variables, such as :
Innovation & Technological
Operation Strategies
Risk factors
Change in Management

3.

Review Torresa assumption in Exhibit 2. Which assumption would


represent a change from Costcos historical performance? Do you feel
her assumptions are appropriate, and if not, which ones would you
change?
Assumption of The additional number of stores (warehouse) would
represent a change from Costcos historical performance. Base on 5
year historical (1997 2001) additional member yearly about 1100, on
Torres assumption the additional member about 1500 which also
increase the annual sales.

4.

Review Toress forecasted income statement and common-size income


statement. Do you feel these are achievable results for Costco?

http://www.investopedia.com/terms/o/operatingmargin.asp

5.

6.

3
4

Yes, with the assumption sales growth 10% and all the factors could be
achieved, we think it can be achieved.
Review Torress forecasted in Exhibit 5. How does the rate of expansion
(i.e. new store openings) affect the balance sheet and free cash flow?
Do you agree with her terminal value assumptions?
New store opening increase fixed assets which is financed by longterm
debt. It means that if we make an investment in assets but we cant
make the positive growtht significantly of net income, so we will report
the decreasing of return of equity.
The firms cash flow represents the amounts of cash flow available to
investors, the providers of debt (creditors) and equity (owners), after
the firm has met all operating needs and paid for invesments in net
fixed assets and net current assets. 3 New store or warehouse will
increase the longterm assets, which is as one of deduction from net
income to results the free cash flow. Increasing investment in
the asset must be
followed by
an
increasing
in sales so
that
Costco could generate a positive net cash flow and growing.
The equity method is generally used when the investor in a corporation
is able to exert significant influence over the operation and policies of
the corporation. Usually, this occurs when the investor owns at least 20
percent of the voting stock in the corporation. Equity method record
the purchase of the stock on your books at the time of purchase, for
the actual purchase price. The entry on your books appears as a debit
to investments (an asset account), and credit to cash (an asset
account). Record on your books any increase in the value of your stock
investment, according to the equity method of accounting for stock
investments. Upon the close of the investee corporation's accounting
period--annually or quarterly, for instance--determine if the
corporation's stock value has increased. This information will be made
available to you in the investee corporation's financial reports.
Calculate the net increase in the value of your stock investment by
multiplying the number of shares you own by the net increase in value
per share. The net gain is recorded debit to investments and credit to
income from investments (a revenue account). If your stock equity
decreases instead increasing, record the loss on your books according
to the equity method of accounting for stock investments. Record any
dividends that are paid to you. When the investee corporation pays a
dividend, its assets decrease, and likewise so does the value of the
stock that you own. So, when you receive a cash dividend, your net
investment decreases. Therefore the dividend is not recorded as
revenue, but rather as a shift in assets. 4
In this case, Torres kept track of the 20 stores Costco operated in
Mexico were separately. Pro rata share of earnings from the Mexican
stores were disclosed on Costcos Income statement under interest
income and other; capital invested in these stores was listed on the
balance
sheet
under
other
assets.

Gitman,L., Principles of Managerial Finance, Pearson Addison Wesley Boston


http://www.ehow.com/how_4450893_use-accounting-investments-common-stock.html

7.

Review Tores quantitative checks. Compare her projections with


managements forward looking comments. Based on these an other
constraints do you feel that her forecast is realistic, conservative, or
aggressive? What does the theory reversion to the mean say? Which
do you agree with?
A reversion theory suggesting that prices and returns eventually move
back towards the mean or average. This mean or average can
be the historical average of the price or return or another relevant
average such as the growth in the economy or the average return of an
industry. This theory has led to many investing strategies involving the
purchase or sale of stocks or other securities whose recent
performance has greatly differed from their historical averages.
However, a change in returns could be a sign that the company no
longer has the same prospects it once did, in which case it is less likely
that mean reversion will occur. Percent returns and prices are not the
only measures seen as mean reverting; interest rates or even
the price-earnings ratio of a company can be subject to this
phenomenon.5
Based on this theory, we agree that Toress projections is conservative
forecasting because Tores make this forecasting based on the history
data of performances Costco.

8.

Would you recommend that Torres buy, hold, or sell her Costcos shares
at the price of $35.
We recommend that Torres should hold her shares, because it still
represent positive growth of its performances. Based on the Torres
forecasting that PV free cash flow per shares ($41) was greater than
current pershare price ($35) so it means that feasible to invest in
Costco

http://www.investopedia.com/terms/m/meanreversion.asp

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