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Market Multiple Valuation

Market Multiple Valuation. Costco Aileen Huang. Problems for valuation. Reporting date Wal-Mart: Jan. 31 Target: Feb. 2 Dollar General: Feb. 1 Costco: Sep. 2 2013 financial statements not available for three other comparable firms 2012 financial statement instead Winter holiday sale

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Market Multiple Valuation

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  1. Market Multiple Valuation Costco Aileen Huang

  2. Problems for valuation • Reporting date • Wal-Mart: Jan. 31 • Target: Feb. 2 • Dollar General: Feb. 1 • Costco: Sep. 2 • 2013 financial statements not available for three other comparable firms2012 financial statement instead • Winter holiday sale • Business model • Gross margin: Wal-Mart (24%); Target (30%); Dollar General (32%); Costco (13%) • Sales per square foot

  3. Multiple Choices • Balance sheet multiple • NEA: capital structure excluded; enterprise value • Book value: capital structure included; equity value • Income statement multiple • Sales: enterprise value • EPAT: enterprise value • EPAT from sales: enterprise value, comprehensive income excluded • Net Income: Equity value • Industry specific multiple • Sales per square foot

  4. Elimination of multiples • EPAT • Comprehensive income has been volatile • Sales from square foot • Significant difference between Costco and other firms • Membership warehouse, low margin, high volume • Size is excluded

  5. NEA Multiple • Costco share price: $112.13 • Overvalued • Enterprise asset turnover: • EPAT/NEA • Better payment terms Less current assets required for operation • Wal-Mart: 16%; Target: 10%; Dollar General: 14%; Costco: 17%

  6. Book Value Multiple • Costco share price: $112.13 • More accurate than NEA multiple, overvalued • 2013 economic recovery

  7. Sales Multiple • Costco share price: $112.13 • Undervalued • Large volume • Small margin for Costco

  8. EPAT from sales • Costco share price: $112.13 • Overvalued • 2013 economic recovery • Negative NFL, lower risk

  9. Net Income Multiple • Costco share price: $112.13 • Overvalued • 2013 economic recovery

  10. Recommendation • Costco share price: $112.13 • Undervalued • 2013 economic recovery • Investors’ expectation • Better business model • Less leveraged • Recommendation: SELL • Comparability among firms • 2012 financial data • EPAT/NEA accuracy • Market efficiency

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