The value of Costco Company stock varies with the stock valuation model used. The valuation of the company’s stock using the dividend-discounted model, places the stock’s value at $ 151.16. Use ofresidual operating income (ROPI) gives the stock value per share of Costco Company as $695.15. The discounted cash flow valuation model values this stock at $ 695.15. The use of market multiples valuation places the value of the as $46.05 (NOA), $ 65.32 (BV), $84.59 (NOPAT), and $77.12 (NI) multiples. This valuation models have deviates from the current mart price of the company ($ 111.87), with varying margin. The variation in the derived value stems from model assumptions, components, and calculation approach.
The dividend-discounted model considers the future expected dividends pay-out by the company and discounts them to present time. The ROPI uses the retained earnings of the company over the number of the shares. The discounted cash flow values the company using the expected future cash flow as given by the forecasted value. The cash flows are discounted using the company’s WACC. The multiple market models consider various factors such as equity performance and company performance. Each model takes different perspective and uses its own assumptions. The derived value in each model is affected by its component, for example, the discounted dividend model uses the forecasted value of dividends, which are discounted using the estimated cost of capital while the retained earning model uses the retained income of the previous period as the valuing basis.
Question Two and Three
The current stock price of Costco retail store is undervalued. The market price of the stock is $118.87. Although there is no one best agreeable valuation model, discounted dividend valuation model is one of the most basic absolute valuation model. The Costco stock value using DDM is $151.16. The model is justified considering each investor consider the amount of dividend they expect from the company and as such future dividend represent the actual cash flows that will go to the shareholders. Costco operates in a well-developed industry and as such, the company pays predictable and stable dividend. Although DDM gives the intrinsic value of the company based only on fundamental factors, the dividend paid by the company reflects the current performance and future prospect of the company in the ideal situation (Gevorkian 112). This is opposed to other models such as ROPI that considers retained earning which ultimately might not be appropriated to the shareholders.
From the analysis of Costco stock, it would be advisable to buy the stock of this company. Various models have indicated that the share is undervalued and thus it has high prospect of increasing its value in the future. Increment in the share price will increases the shareholders’ capital gain. On top of the consideration of the stock price as undervalued, Costco operates in a growing and developing industry. The retail market is expanding with the rate of middle-income people increasing and the economy of the world stabilizing. The developing economies market is becoming viable for most retailers. The advancement in the technology and supply chain approach presents an opportunity for the company to have a reduced operating cost. This indicates Costco represents a promising investment opportunity where the investors are likely to gain not only in stock returns but also in capital gain.
Gevorkian, Peter. Sustainable energy systems in architectural design a blueprint for green building. New York: McGraw-Hill, 2014. Print.