Finance and Investment Organization Meeting #3 September 28, 2000
Jan 06, 2016
Finance and Investment Organization
Meeting #3September 28, 2000
Agenda
• Markets Review
• Stock Analysis
• Partnership Agreement Review
• Logistics
Dow Jones Industrial
Thursday Opening – 10680.52Wednesday Closing – 10628.36
Down 0.5% for the week
NASDAQ
Thursday Open - 3864.60Wednesday Close - 3656.30
Down 5.8% for the week
S&P500 Index
Thursday Open - 1451.34Wednesday Close - 1426.57
Down 1.7%
Dow Jones Industrial Average
• Oldest continuing US market index
• First average was 40.94 on May 26, 1896
• Originally computed by summing the prices of 12 railroad stocks and dividing by the number of stocks.
• 30 stocks first used in 1928. Same number ever since
• List of stocks changes periodically
Dow Stocks• Alcoa Inc. • American Express Co. • AT & T Corp. • Boeing Co. • Caterpillar Inc. • Citigroup Inc. • Coca-Cola Co. • DuPont Co. • Eastman Kodak Co. • Exxon Mobil Corp.• General Electric Co. • General Motors Corp. • Home Depot Inc. • Honeywell International Inc. • Hewlett-Packard Co.
• International Business Machines Corp. • Intel Corp. • International Paper Co. • J.P. Morgan & Co. • Johnson & Johnson• McDonald's Corp. • Merck & Co. • Microsoft Corp. • Minnesota Mining & Manufacturing Co. • Philip Morris Cos. • Procter & Gamble Co. • SBC Communications Inc. • United Technologies Corp. • Wal-Mart Stores Inc. • Walt Disney Co.
Dow Jones Industrial Average
• Most recent change – Nov 1, 1999– Removed Union Carbide, Sears, Goodyear, and
Chevron – Replaced with Intel, Microsoft, SBC
Communications, and Home Depot
• Each company has same weight in index regardless of market capitalization
Nasdaq
• Index based on all 4400 companies that trade on the NASDAQ stock exchange
• Predominantly newer and smaller companies
• Market capitalization based index– Bigger companies have a greater weighting on
the movement of the index
S&P500 Index
• A market capitalization based index composed of the 500 biggest companies in America.
• Represents about 80% of the total market capitalization on all US markets.
• One of the broadest and best indicators of the stock market’s performance
• Wilshire Market Index – total market indexhttp://university.smartmoney.com/departments/investing101/stocks/index.cfm?story=largecaps
Movers of The Stock Market
• Earnings/Revenues Warnings– – Intel, Priceline, Eastman Kodak, Guess– Recall that price of a stock is ultimately
dependent on the stream of future earnings.
• Weakness of the Euro– American companies report their earnings in
dollars. Changing exchange rates can affect their earnings by a large amount.
– January 1999 – 1 Euro = $1.17– September 2000 – 1 Euro = $0.85
Market Movers
• Oil prices– $37.80/barrel late last week.– $8-10 last year– Risk of global recession– Release of US Strategic Petroleum Reserve and
OPEC production hikes
• Inflation– Calculation error– Effect on the Federal Reserve
Stock Analysis
Quote Details
COSTCO WHOLESAL (NasdaqNM:COST) - More Info: News , Msgs , Profile , Research , Insider , Options
Last TradeSep 27 · 34 9/16
Change+3/4 (+2.22%)
Prev Cls33 13/16
Volume3,937,500
Div DateJan 13, 2000
Day's Range33 15/16 - 34 13/16
Bid34 1/8
Ask34 3/4
Open34 1/8
Avg Vol4,892,545
Ex-DivJan 14, 2000
52-week Range25 15/16 - 60 1/2
Earn/Shr1.25
P/E27.05
Mkt Cap15.449B
Div/ShrN/A
YieldN/A
URL’s for Reports
• http://www.bjsinvestor.com/news/20000815-21698.cfm
• http://www.walmartstores.com/newsstand/archive/prf_000809_2ndqtr.shtml
• http://quicken.elogic.com/sec_grab.asp?ticker=COST&faddr=edgar%2Fdata%2F909832%2F0000912057%2D00%2D028647%2Etxt&fkey=0000912057%2D00%2D028647&ftype=10%2DQ
Costco Wholesale Corporation
• Began operations in Seattle, WA in 1983• Merged with The Price Company in 1993• Operates a chain of membership
warehouses that sell high quality, nationally branded or selected private label merchandise at low prices to businesses for resale and to individuals.
• Business based on high sales volume and rapid inventory turnover
Warehouses
• 312 warehouses– 237 in 27 states in the US– 59 in 9 provinces in Canada– 18 in Mexico with a joint partner– 9 in the United Kingdom– 3 in Korea– 3 in Taiwan– 1 in Japan
Financials
• Sales increased 13% to $27.46 billion in fiscal 1999
• Operating income increased 16% to $860 million
• Net income increased 12% to $515 million
Major Competitors
Costco Sam’s Club BJ’s
Sales $27.46 billion $24.80 billion $4.12 billion
Stores 292 512 107
Sales/Store $94 million $48 million $39 million
Op Income $860 million $650 million $178 million
Op Margin 3.13% 2.62% 4.32%
Time is Money
• Two ways to make money– Cash Kings rely on high margin businesses.
• Focus on making more money
• Recall high gross and net margins of INTC last week
– Merchant Kings rely on rapid inventory turnover
• Focus on using less time
• We will see this with COST this week
Some Math
• A distributor with faster inventory turnover can thrive with a lower profit margin because they make profit more often and compound their earnings more rapidly– 30% profit compounded 4 times = 2.86 times
original amount– 15% profit compounded 8 times = 3.06 times
original amount
Businesss Model
• Steal customers from competitors by offering lower prices
• Fend off competitors by offering low costs, economies of sales, and customer loyalty
How does Costco do this?
• No stores – customers come to warehouse• No bags – boxes instead• No fancy displays – pallets instead• No advertising – word of mouth instead• No directional signs – more browsing• Limited hours – Open only 68 hours a week• If price exceeds cost by 14% alert triggered.
Management is dedicated to passing the savings to the consumer
• Kirkland brand puts pressure on their suppliers
Consumer Profile
• Average check - $95 per visit– Stable for the past five years
• Trip frequency has doubled– Once every three weeks in 1995– Once every ten days in 1999
• Membership Renewal Rate– 85% for individuals– 97% for small businesses– 30 million members in North America
Costco Store Sales DataYear
Opened#
StoresAverage Sales Per Warehouse in Millions
1999 14 65
1998 17 50 58
1997 10 56 70 85
1996 18 46 53 61 68
1995 19 51 58 69 76 82
1994 27 51 58 69 76 83 90
1993 34 59 62 69 74 79 84 90
1992 26 48 54 61 65 69 75 80 87
1991 20 49 58 60 63 64 67 71 77 84
<1990 107 83 93 98 93 91 89 92 99 106 116
Total 292 83 86 84 78 76 75 77 83 87 94
Fiscal Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Why So Happy?
• Low prices for high quality/high end merchandise.
• Surprises – always changing inventory.– Only 4000 different products per store.– Compare to 40,000 for a supermarket and
125,000 for a Wal-Mart SuperCenter– Keeps customers coming back so they don’t
miss something– Costco shops for them by searching for the best
at the best price.
Days Inventory Outstanding (DIO)
• How long would it take to sell all the inventory of a company?
• DIO = Average Inventory x # Days in Period for CGSCost of Goods Sold
For Costco = $2.367 Billion x 84 days / $6.768 Billion
= 29 days for Q2 2000
For Wal-Mart = $31.093 Billion x 91 days / $36.044 Billion
= 79 days for Q2 2000
For BJ’s = 40 days for Q2 2000
We want this to be as low as possible
Days of Sales Outstanding (DSO)
• DSO = Accounts Receivable/(Sales/# Days)• A low number means that a company is quickly
collecting its receivables from its customers and not giving out long term interest free loans.
• COST= $0.166 Billion / ($6.768 Billion/84)= 2.06 days
• WMT = $1.249 Billion / ($46.588/91)= 2.44 days
• BJ = 3.92 daysWe want this as low as possible.
Days Payable Oustanding (DPO)
• DPO = Accounts Payable/(Cost of Goods Sold /# days)
• How long is it taking the company to pay its suppliers?
• COST = $2.01 Billion/($6.08 Billion/84)= 28 days
• WMT = $12.63 Billion/($36.04 Billion/91)
= 32 days• BJ = 27 daysWe want this as high as possible.
Cash Conversion Cycle (CCC)
• CCC = DIO + DSO – DPO• What does this mean?
– How long it takes to purchase a raw material, convert it into finished goods, sell the finished good and get paid for it.
COST WMT BJ
Days Sales Oustanding (DSO) 2 2 4
Days Inventory Outstanding (DIO) 29 79 40
Days Payable Outstanding (DPO) (28) (32) (27)
= Cash Converstion Cycle (CCC) 3 49 17
Sales, General, and Administrative Expenses (SG&A)
• As a percentage of sales, we want this to be as low as possible
COST = $0.605 Billion / $6.769 Billion
= 8.93%
WMT = $7.625 Billion / $46.588 Billion
= 16.37%
Inventory Shrinkage
• Basically shoplifting by customers or embezzling by employees. More accessible than cash.
• On average 2.4% for discount stores but as high as 5% for department stores
• 0.5% at Costco.– Big items are hard to steal.– Good checkers at the door.– Happy customers
Future Growth
• Only 237 US stores right now
• 450 for Sam’s Club, 750 for Home Depot
• No stores in Texas and much of Midwest
• International expansion
• 25 stores this year
• 40 in 2001
• Older stores do more business
New Initiatives
• Ancillary businesses– Pharmacy, optical dispensing centers, photo developing,
print shops, copy centers, gas stations, food courts, hearing aid centers.
• Costco.com– 2 million registered members– $60 million in sales this year and profitable
• Co-branded card with American Express– First co-branded card for American Express– Additional convenience. Typically only cash and check.
Current Stock Prices
COST WMT BJ S&P500
Price 35 7/8 48 35 7/16 N/A
Current FY Earnings
$1.35 (8/00) $1.46 (1/01) $1.76 (1/01) N/A
Next FY Earnings $1.51 (8/01) $1.68 (1/02) $2.04 (1/02) N/A
Current FY P/E 26.6 32.9 20.1 24.6
Next FY P/E 23.8 28.6 17.4 22.5
Next 5 Years Earnings Growth
15.3% 14.9% 15.7% 11.2%
Price to Earnings Growth Ratio
1.74 2.21 1.28 1.80
Price to Earnings Growth Ratio = PE Ratio / Earnings Growth Rate
More Ratios
• Price to Earnings Growth Ratio = PE/Growth– Companies with high growth rates tend to attract more
investors.– Indicator for how much investors are willing to pay for
each percentage of growth
• Price to Sales Ratio = Price/Sales Per Share– Often easier calculated by market cap/total sales– Alternate form for valuing companies from P/E particularly
for companies with no earnings or losses– Earnings not always believable. Can be managed or have
unusual items. E.g. writeoffs, accounting adjustments, goodwill.
Even More Ratios
• Price to Cash Flow = Market Cap/Annual Cash Flow– Cash flow is the real cost of doing business. Certain expenses in
the income statement are not cash outlays. E.g. depreciation
• Price to Book Value = Stock Price/Book Value Per Share– Book value is what would be left if all the companies assets
were sold, its liabilities paid off, and debt retired.
– Better for traditional industries not technology companies
Comparison
COST WMT BJ
Price 35 7/8 48 35 7/16
Market Capitalization
$16.0 B $215.1 B $2.6 B
Price to Earnings Growth Ratio
1.74 2.21 1.28
Price to Sales 0.59 1.17 0.55
Price to Cash Flow 93 -197 -70
Price to Book 3.79 7.65 4.28
Stock Charts from MoneyCentral
• 1 year
• 3 year
• 5 year
• Relative bargain – prices not seen since early 99.
• Market cap only $15.5 billion. Compare to WMT - $215 billion.
Rulemaker Review
• See spreadsheet on web page
Logistics
• Key Points– 6. No partner’s share may exceed 20%– 9. Decisions require 2/3 majority based on
assets not people– 16. Maximum number of partners is 40.
Addition requires unanimous consent– 17. Removal of partner and termination of
partnership requires 2/3 majority.– 20. Terms of payment. 97% of value or value
minus costs whichever is less within 10 days