Costco Wholesale (COST)

Total return at 5 years: -2.1%/year = -3.0% appreciation + 0.9% dividend. The target price ($825) is ex-dividend; the $39 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $722 · Multiples $696) is below the market price ($959).

Today — expensive, no margin of safety: at $959 trades ~37.8% above its value discounted to today (~$696); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$436.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($959) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (16.1%/year) above our base case (9.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$19.5 bn of owner earnings in year 5 (vs ~$14.2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo (EV/EBIT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is the real TTM, which coincides with fiscal 2026 closed on Aug 30, 2026 (52 weeks, 10-K and XBRL): revenue US$303.2bn (+10.1%), operating income US$11.7bn (3.9% margin), net income US$9.2bn. Costco is membership retail: it earns with fees (a US$5.9bn annuity, +11%, almost all margin, ~51% of operating income, 92.3% renewal in the U.S. and Canada) on top of a near-cost merchandise operation (~11% gross margin). It is valued at the enterprise level, with a multiple on operating income; the membership annuity is the narrative of why the multiple carries a premium, not a separate piece. Costco does not publish revenue or earnings guidance; the release and the 10-K only bring the investment plan (capex of ~US$7.5bn and up to 33 openings, five of them relocations, in fiscal 2027), which is incorporated into year-1 capex. Year 1 (fiscal 2027, also 52 weeks, with no extra week in either the base year or year 1) starts from the normalized trajectory and not from the reported total: in 2026 revenue grew 10.1%, but 1.3 points came from the gasoline price and 0.5 from foreign exchange, and comparable sales excluding both were +6.6% (+6.7% in the fourth quarter, when reported net sales grew 11.2%). The 8.3% in year 1 equals the pace of the fourth quarter excluding gasoline and foreign exchange (11.2% less 2.7 points), with net openings of 25 to 28 warehouses a year and fees growing faster than sales. Base-year operating income includes about US$0.09bn of IEEPA tariff refunds net of their reinvestment in prices (3 basis points of gross margin); it is non-recurring and is declared without adjusting the base year because it weighs 0.8% of operating income. Earnings compound ~9.5% a year (revenue +8% decelerating + modest margin expansion from the membership mix). Exit multiple 19.3× operating income (downside 17× / upside 21×): above the midpoint of the membership wholesale club band, a large premium over an ordinary retailer for the membership moat and growth, and still well below the multiple at which it trades. The net cash of US$15.1 billion (cash and short-term investments of US$21.3 billion less debt of US$6.2 billion) is shown in the enterprise-value-to-equity bridge, which is where the reader sees it; the last special dividend (US$15 per share) was in January 2024, there was none in 2026 and none is projected. At today's entry multiple the operating income yield falls below the risk-free rate, so compression toward the exit band eats the growth → the price discounts perfection. What to watch: not the business (92% renewal, adjusted comps +6.6%), but the multiple.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $825 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $959, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $825 in 5 years plus $39 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $696. Against the current market price ($959), the margin of safety is -37.8% (trades above the maximum → a premium is paid) and the total return at that price would be -2.1% annually.

• A single business, a single multiple. It is valued at the enterprise level on EV/EBIT over operating income; the membership annuity is the narrative for why the multiple carries a premium, not a separate piece. A warehouse-club archetype (a premium over ordinary retail).
• The software-like multiple. At ~35× operating income over a retailer growing ~9%, with a yield below the risk-free rate. It compresses toward ~23× even at a premium exit.
• The DCF is severe. The DCF (at the risk-free rate, no-growth terminal) gives a value today well below the price: the flow does not sustain today's multiple, even adding the net cash.
• Margin of safety at the end. At ~$959 the base return (~-2%) falls short of the required average return (10%): it compounds earnings, but the multiple already discounts the success. No margin of safety.
• The best business, the worst price. Costco combines very high quality with an extreme valuation — the archetypal case of an excellent business that is only worth buying on a pullback.
• The specials optionality. Net cash ($15.1bn) could be returned through a special dividend, like the $15 per share one of January 2024; none is committed and the base case does not include it, so it is a possible additional return that does not change the overvaluation picture.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (95%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong, predictable cash flow. Operating cash flow (~$15.8bn) is strong and predictable; negative working capital (supplier float) boosts it. It generates growing net cash ($15.1bn).
• Return on capital. Extremely high, well above the 10% bar: the membership annuity plus the float plus the asset-efficient model. One of the best in retail.
• Creates economic value. Yes, with ample room — return on capital far exceeds the opportunity cost, and growth reinvests at those returns. Strong value creation.
• Multiple trap. The one flaw: the multiple of ~35× operating income, with a yield below the risk-free rate. An excellent business at a price that already discounts perfection — it is valued on a premium but disciplined exit multiple.
• Working-capital float. Costco sells the merchandise before paying the supplier (negative working capital) — a float that funds the business and boosts the return on capital.
• Immaterial SBC. Stock-based compensation (~$0.9bn, ~0.3% of revenue) is immaterial → there is no SBC trap; operating income already records it as an expense.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Revenue is merchandise (volume × price, with a razor-thin gross margin of ~11%, almost at cost) + membership fees (the annuity: members × fee, ~$5.9bn almost all margin, ~51% of operating income). The 92.3% renewal makes the annuity recurring; pricing power was demonstrated with the Sep-2024 fee increase (no damage to renewal). Growth adds new warehouses (25 net in 2026), digital commerce (+21%) and the Executive mix (75.2% of net sales). Negative working capital (it sells before paying the supplier) — a float that funds the business.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-ago-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real growth, not nominal. Revenue +10.1% includes 1.8 points of gasoline and foreign exchange; the rest is real (volume + memberships + digital commerce), with comps excluding fuel and foreign exchange of +6.6% — genuine volume and membership growth.
• Where the engine comes from. The fee annuity (~51% of operating income, +10-13%) plus merchandise volume plus e-commerce (+21%) plus new warehouses (international faster).
• Pulled by membership and volume. Paid members +3.8% (84.1 million), fees with pricing power, Executive mix rising (75.2% of net sales). Quality, recurring growth.
• Realistic deceleration. The base case projects earnings compounding ~9-10%, decelerating modestly; comparable sales excluding fuel and foreign exchange were +6.6% in 2026 versus +8% in 2025 (anchored to the underlying trend, not to the reported total that gasoline moves).
• Reinvestment runway. Ample: new warehouses (25 net in 2026, up to 33 openings planned for 2027, international with more runway), digital commerce, and fees — at a very high return on capital.
• Geographic concentration. US/Canada are 86% of sales and California is 26% of the US: the international runway is real but the base remains concentrated.

• Relevant in 10 years / recurrence. Yes — the membership annuity (92% renewal) is among the most recurring and predictable revenue sources in retail; value-seeking consumption is structural.
• Market share / cost. Membership club with $303bn of revenue and a low cost structure thanks to the low-cost model + scale. It gains share consistently.
• Pricing power. Demonstrated and rare: raised the fee in Sep-2024 (the first since 2017) without hurting renewal (92.3%→92.2%) or member growth — extremely high-margin pricing power.
• Operating leverage. The membership annuity (almost all margin) provides leverage; the counterweight is the razor-thin merchandise margin (~11% gross), where 'modest changes' move earnings disproportionately.
• Capital cycle / competition. It competes with Amazon (e-commerce + AI), Walmart/Sam's and BJ's; scale, loyalty and the cost model are the defense. The moat holds up well against capital entry.
• Behavior in a recession. Very defensive: in a recession, consumers seek value and Costco gains traffic and memberships; uninterrupted positive comps for years.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $15.1 bn
• ✓Interest coverage (EBIT / interest)80.6x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 95% of ROIC
• ✓Value creation (ROIC − 10% bar)+11pp
• !Malinvestment test (capex vs incremental ROIC)Strong investment mode 2.4x
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Fortress balance sheet. Net cash $15.1bn (cash and short-term investments $21.3bn against debt of $6.2bn); supplier float (negative working capital) funds the business. Zero solvency risk.
• Cash generation. Operating cash flow (~$15.8bn) covers capex (~$6.4bn) and the dividend ($2.5bn) and leaves a surplus that accumulates as net cash. Very strong.
• Negative working capital. Costco sells before paying the supplier: a structural float that reduces invested capital and boosts the return — a superpower of the model.
• Thin margin. The operating margin (~3.9%) is thin: health comes from volume, membership and the balance sheet, not from unit margin. A cost shock hits disproportionately.
• No leverage. Debt is minimal and net cash is growing; the balance sheet is among the strongest in retail.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Reinvests in warehouses at an extremely high return plus returns the surplus via dividend (regular plus special). Disciplined; the return on capital backs it up.
• Alignment / skin in the game. Professional management (insiders <1%), with ownership guidelines (7× salary). No founder control. Alignment through structure, not large ownership.
• Capital return. Growing regular dividend (22 years, +13% in 2026) + a special dividend from net cash ($15/share in Jan-2024). Consistent and growing return, tilted toward dividends.
• Succession / culture. Vachris (25+ internal years) succeeded Jelinek in Jan-2024; the old guard retired from the board. The low-cost/value culture is the asset to preserve; an orderly transition.

• It is not cheap: at ~35× operating income over a retailer growing ~9%, the price pays a premium that growth cannot cover within the horizon.
• The quality is real (92% renewal, pricing power, wide moat) and justifies a premium, but the earnings yield does not even cover the risk-free rate — the perception (a perfect compounder) sits above, not below, reality.
• The market pays for Costco's specific execution, scale and brand at a multiple far above the warehouse club band (17-21×).

Costco is an exceptional business at a price of perfection, the opposite of a value opportunity. The quality of the membership annuity justifies a premium over a normal retailer, but not an earnings yield below the risk-free rate. Without a perception-reality discrepancy in its favor, there is no margin of safety; it is a business to buy on a pullback.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -7%/year (-31% total): the margin of safety protects the downside. The bull (+2%/year, +9% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Valuation / software-like multiple. At ~35× operating income, with a yield below the risk-free rate, over ~9% growth: any slowdown or shock triggers a large re-rating toward the 17-21× warehouse club band — the central risk.
• Tariffs. The 10-K itself: «higher tariffs are more likely to adversely impact rather than improve» results; on a razor-thin margin, cost pressure hits earnings. In February 2026 the Supreme Court ruled the IEEPA tariffs unlawful and Costco received refunds ($184M in 2026 and $155M after year-end), most of which it is reinvesting in lower prices for members.
• Amazon competition + AI. Amazon competes in e-commerce and adopts AI faster; Walmart/Sam's and BJ's apply pressure. Loyalty and cost are the defense, but the threat is real.
• Geographic concentration. US/Canada 86% of sales, California 26% of the US: a regional slowdown or local shock weighs; the international runway is real but the base is concentrated.
• Sensitivity to gasoline. The price of gasoline moves reported comps and margin by hundreds of basis points each period — noise that can obscure the underlying trend.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 21% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 9% at a multiple/growth of 3.9 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 3% (EBIT/EV) + ROIC 21% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 16% vs our 9%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -8%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, cost advantage, efficient scale, intangibles, network effects → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 16% growth, far above our 9% — heroic assumptions.