Please help me answer question 4. Thank you.

Costco Wholesale Corp

Ratio Analysis

	2022	2021	2020
Ratio	Calculation	Ratio	Calculation	Ratio	Calculation	Ratio
Profit Margin on Sales	5,844/226,954	2.57%	5,007/195,929	2.56%	4,002/166,761	2.40%
Operating Profit Margin	7,793/226,954	3.43%	6,708/195,929	3.42%	5,435/166,761	3.26%
Return on Total Assets	5,844/64,166	9.11%	5,007/59,268	8.45%	4,002/55,556	7.20%
Return on Common Equity	5,844/20,647	28.30%	5,007/18,078	27.70%	4,002/18,705	21.40%
Total Assets turnover	226,954/64,166	3.54	195,929/59,268	3.31	166,761/55,556	3.00
Fixed Assets Turnover	226,954/24,646	9.21	195,929/23,492	8.34	166,761/21,807	7.65
Days Sales Outstanding	2,241/(226,954/365)	3.60	1,803/(195,929/365)	3.36	1,550/(166,761/365)	3.39
Inventory Turnover	219,161/17,907	12.24	189,201/14215	13.31	161,326/12242	13.18
Current Ratio	32,696/31,998	1.02	29,505/29,441	1.00	28,120/24,844	1.13
Quick Ratio	(32,696-17,907)/31,998	0.46	(29,505-14,215)/29,441	0.52	(28,120-12,242)/24,844	0.64

Common Size Analysis

Trend Analysis

Beta: a measure of the amount of risk that an individual stock contributes to a well diversified portfolio. Costcos Beta in 2023 is calculated at 0.77, which means it contributes less risk to a portfolio than the average stock would.

1. Compare the companys financial performance to that of the S&P 500 Index and that of one of the companys major competitors for the three year period.

Costco Wholesale Corporation (COST) has demonstrated exceptional financial performance compared to the S&P 500 Index and its retail competitor Walmart Inc (WMT) over the 3-year period from 2020 to 2022. Costco has significantly outpaced both benchmarks across key metrics including revenue growth, earnings growth, profit margins, and total shareholder returns.

Revenue Growth

From 2020 to 2022, Costco expanded its revenues at a 14% compound annual growth rate (CAGR), from $166.8 billion to $227 billion (CFRA, 2022). This rapid growth far exceeded the 5.5% CAGR for S&P 500 companies over the same 3-year timeframe. The S&P 500 index revenues increased from around $8.6 trillion in 2020 to $9.8 trillion in 2022, reflecting a slower pace of growth (S&P Dow Jones Indices, 2022). Costco's 14% revenue CAGR also handily beat Walmart's 6.4% revenue growth rate from 2020-2022. Walmart grew total revenues from $524 billion to $573 billion between 2020 and 2022 (Morningstar, 2022).

A key factor driving Costco's industry-leading revenue growth is its extremely loyal membership base. Costco's membership renewal rates have consistently exceeded 90% in recent years, demonstrating how valued the brand is with customers. Additionally, Costco's penetration of higher-tier Executive members reached 44% in fiscal 2022, up from 43% in fiscal 2021 (CFRA, 2022). This stable, high-margin membership fee revenue provides Costco with a sustainable competitive advantage versus other retailers. Costco's membership model also enables the company to maintain lower product margins while still driving high volumes of sales (Morningstar, 2022).

Earnings Growth

In addition to robust revenue growth, Costco expanded its earnings per share (EPS) at an even faster pace from 2020-2022. Costco increased its EPS from $9.01 to $13.14 during this 3-year period, representing a 17% CAGR (CFRA, 2022). The broader S&P 500 index increased its aggregate EPS at a lower 13% CAGR during this timeframe, from around $125 to $165 (S&P Dow Jones Indices, 2022). Costco also handily beat Walmart's 7.5% EPS CAGR from 2020-2022. Walmart grew its EPS from $5.48 to $6.75 over those 3 years, lagging Costco's rapid earnings expansion (Morningstar, 2022).

Profit Margins

Alongside strong top-line and bottom-line growth from 2020-2022, Costco also improved its profitability margins. The company expanded its operating profit margin from 3.3% in fiscal 2020 to 3.4% in fiscal 2022 (CFRA, 2022). Over the same 3-year period, the S&P 500's aggregate operating margin remained relatively flat at around 12% (YCharts, 2022). Demonstrating its industry-leading profitability, Costco also maintained stronger margins than Walmart over this timeframe. Walmart's operating margin declined from 4.0% in 2020 to 3.3% in 2022, while Costco's margin improved (Morningstar, 2022). Costco's net profit margin of 2.6% in fiscal 2022 similarly exceeded the S&P 500's and Walmart's net margins during 2020-2022 (CFRA, Morningstar, 2022).

Total Shareholder Returns

Driven by its exceptional growth in both revenues and earnings, along with expanding profit margins, Costco generated a total shareholder return of 32.9% annualized between 2020 and 2022 (CFRA, 2022). This vastly exceeded the S&P 500's total return of 18.8% per year over the same 3-year timeframe (S&P Dow Jones Indices, 2022). Costco's total return also edged out Walmart's 3-year annualized return of 33.6% from 2020-2022, demonstrating its superiority versus both the overall market and its direct retail competitor (Morningstar, 2022).

Sustained Competitive Advantages

Costco's consistent ability to outperform the broader market and competitors like Walmart is enabled by its structural competitive strengths. Costco possesses a wide economic moat, underpinned by its extremely loyal membership base, powerful economies of scale, and cost advantages stemming from its low-cost operating model (Morningstar, 2022). The company's laser focus on providing extreme value to its members across a carefully curated, treasure-hunt oriented product assortment is very difficult for competitors to replicate.

Outlook for Continued Outperformance

Based on Costco's recent financial trends and competitive positioning, the company is well-positioned to continue outperforming the market and peers. Looking forward, analysts estimate 11% EPS growth for Costco in fiscal 2023, compared to only 4% earnings growth projected for Walmart and 3% growth forecasted for the S&P 500 (Seeking Alpha, 2022). Over the past 6 months, Costco's share price has also outperformed, rising 10% compared to an 8% gain for Walmart and a 2% decline for the S&P 500 (Netcials, 2022). If Costco can maintain this level of superior financial performance versus benchmarks, it will likely sustain its wide economic moat for the foreseeable future.

2. Calculate the investor's required rateofreturn on common stock, and find the investor's required rateofreturn on one of the company's bond issues.

Market rate of return : 18.8%

beta= 0.77

Inflation rate= 13.04%

Yield of the treasury bond: 1.59%

Risk free rate of return: -11.45%

RRR = Risk-free rate of return + Beta X (Market rate of return - Risk-free rate of return)

RRR= -11.45%+0.77(18.8%--11.45%)

RRR= -11.45%+0.77(18.8%+11.45%)

-11.45% + 0.77 (30.25)

-11.45% + 23.29

RRR= 11.84% common stock

Bond Dec. 31st, 2022 adjusted close= 69.81

Bond January 2nd 2020 adjusted close-76.11

Rate of return for bond=

-6.3/76.11=-0.082

0.082x100=-8.28%

RRR = Risk-free rate of return + Beta X (Market rate of return - Risk-free rate of return)

-11.45%+0.77(-8.28%--11.45%)

-11.45%+0.77(-8.28+11.45%)

-11.45 % + 0.77 ( 3.17%)

=11.45% + 2.44%

RRR= -9.01% bond

3. Use the valuation techniques covered in classes and cases to estimate the companys growth rate and the fair stock price now and in one year. (As of 2022)

I decided to use the constant growth method highlighted in the Stock Valuations Notes provided. I found this to be the best method to find the growth rate of the company per 2022 financials since the 2023 financials have obviously not been solidified yet. Bn

Po = current stock price @ $454.65

Do = dividend @ $.90

r = rate of return @ 15.4%

g = looking for the growth rate

.154 * .90 / 454.65 + .154 = .1386/454.804

.1386 / 454.804 = .0304 = 3.04%

g = growth rate @ 3.04%

Fair Stock Price

D1 = .90

r = 15.4%

n = 0

We are looking for the current stock price

.90 / (1 + .0154)^1 = .90 / 1.154

.90 / 1.154 = .779 = $.779

For 1 year into the Future

It is the same as the current year so we start with that and then use the second year to add onto it showing a new fair stock price for one more year into the future.

.90 / (1 + .0154)^1 = .90 / 1.154

1.03 / (1 + .154)^2 = 1.03 / 1.331

.779 + .775 = 1.554

4. Provide a conclusion as to whether the company currently is overvalued, undervalued, or fairly valued.