COSTCO WHOLESALE CORP /NEW (COST) stock intrinsic value fair value estimate & owner earnings analysis

Costco runs membership warehouses: shoppers pay an annual fee to shop a narrow assortment of goods priced at thin markups, and the fee income is where most of the profit comes from. At August 30, 2026 Costco operated 939 warehouses (647 in the United States, 115 in Canada, 43 in Mexico, 37 in Japan, 29 in the United Kingdom, 20 in Korea, 15 in Australia and the rest in Taiwan, China, Spain, France, Sweden, Iceland and New Zealand), up from 914 a year earlier and 890 two years earlier. In fiscal 2026 net sales rose 10% to about $297 billion, comparable sales excluding gasoline and currency rose 7%, membership fees rose 11% to $5.9 billion, and member renewal rates were 92.3% in the U.S. and Canada and 89.8% worldwide. How we measure earnings. We use owner earnings: operating cash flow with working-capital swings removed, stock compensation treated as a real cost, and only the share of capital spending needed to keep the existing business running deducted. Capital spending above what sales growth would normally require is treated as maintenance, which assigns most of Costco's $6.4 billion fiscal 2026 capital budget to maintenance even though much of it builds new warehouses; this is a deliberately cautious choice. Fiscal 2026 owner earnings were about $6.67 billion, or $15.01 per share, up 19% from $12.61. The figure reconciles exactly to net income plus depreciation and other non-cash charges less maintenance capital spending. We value the business before its lenders by adding back cash interest (about $103 million in fiscal 2026), giving business cash flow of about $15.24 per share. The starting level. We anchor on the median of fiscal 2022 through 2026, about $12.50 per share of business cash flow, rather than the fiscal 2026 figure. The jump in 2026 partly reflects the September 2024 fee increase in the U.S. and Canada, which the company says supplied about 30% of membership income growth in 2026 and 40% in 2025, and that boost fades as the increase is fully absorbed. Fiscal 2026 business cash flow grew about 19%; our base case assumes 8% in year one from the lower anchor, which still leaves year one below what the business actually earned in 2026. Debt. Costco owes $6.16 billion of long-term debt (including $2.25 billion due within a year, chiefly the 3.000% notes due May 2027 and 1.375% notes due June 2027) and $1.41 billion of finance leases. The four senior note issues carry fixed coupons of 1.375% to 3.000%, well below current long-term rates, which we credit at about $0.5 billion, for a net debt figure of about $7.07 billion, or $15.91 per share. Costco also holds about $21.3 billion of cash and short-term investments; we do not add this to value because interest earned on it is already inside owner earnings and much of it is funded by supplier payables and prepaid memberships. Interest coverage is very wide in every case, so refinancing the 2027 maturities is not a meaningful risk. Bear case: about $230 per share. Growth of 4% a year for two years, then a recession of the depth Costco actually experienced in fiscal 2009, when sales fell about 2% and net income fell about 15% (from $1.28 billion to $1.09 billion), which we apply as a 15% drop in business cash flow in year three, followed by a two-year recovery of 9% and 8%. After that, growth slows to 3% a year for five years, then stops entirely, with the store base treated as saturated and no further fee increases credited. The business is worth about $109.5 billion; less net debt of $7.07 billion leaves about $102.4 billion, or $230.44 per share. Base case: about $408 per share. Growth of 8% a year for five years and 6% for the next five, then 3% a year for ten more years before leveling off with no further growth. The growth we credit rests on mechanisms Costco has run for many years: opening roughly 25 net new warehouses a year (about 2.7% unit growth), steady comparable-sales gains at existing warehouses (7% in fiscal 2026 excluding gasoline and currency), and periodic membership fee increases, the most recent in September 2024. We do not credit new markets beyond the steady pace already demonstrated, margin expansion, or e-commerce gains beyond what is already in the numbers. The business is worth about $188.4 billion; less net debt leaves about $181.4 billion, or $408.10 per share. Bull case: about $625 per share. The fiscal 2026 level of $15.24 holds as the new base rather than fading back, and the same opening pace, comparable-sales record and fee increases compound at 10% a year for five years and 8% for five, then 4% a year for ten more before leveling off. The business is worth about $285.0 billion; less net debt leaves about $278.0 billion, or $625.43 per share. Roughly 59% to 72% of each case's value comes from years beyond the first decade. We think that is defensible for a business whose renewal rates and warehouse economics have held for decades, but it means the estimates depend heavily on Costco's long-term durability. Margin-of-safety price: $200. The earnings level is about as dependable as retail gets: renewal rates near 90% worldwide, a fee stream that grew 11% last year, and a business that saw net income fall only about 15% in the 2009 recession. The worst plausible outcome no case fully models is a sustained loss of member trust or a pricing shift that erodes renewal rates, since fee income is the profit engine; the balance sheet, with net debt of only about $7 billion against roughly $21 billion of cash, would easily survive it. The things we are most likely to be wrong about are how much of fiscal 2026's jump is permanent, how long new warehouses keep opening at today's pace, and how much value lies beyond year ten. If 2026 fades fully back and growth stops after year ten, the shares are worth about the bear case of $230. The price assumes a five-year holding period with a dividend of $5.88 a year (the current $1.47 quarterly rate) growing about 6% a year. From $200, the base case implies roughly 20.7% a year over five years, while the bear case implies roughly 7% a year, so the bear case still implies a gain from that price. Above about $205 the base case falls short of 20% a year. Our previous estimate was made on a different basis and its figures are not comparable. Since then Costco has reported fiscal 2026 results, with owner earnings up 19% and 25 net new warehouses, and those results are reflected here.