How to think about Costco valuation ($COST)

This is a response to someone on Costco valuation.

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Alter,

Costco is selling at a premium but it is not wildly expensive.

Let me elaborate.

If there is one feature that everyone admire, even the bears, is that Costco is "consistent and reliable".

How does "consistent and reliable" translate to a premium ? If you think about the modern DCF method, it is about inputing an abnormal growth rate over a period of time before it loses its competitive advantage and grow like the general economy or industry (terminal growth). Therefore one could think of "moat" translating to the duratiion of abnormal growth.

Today's DCF practicitioners use 5 years for many types of industries. In the past, this used to be 10 years. The duration of abnormal growth is part industry and part company, eg. a restaurant like CAVA or Sweet Green, i would not want to use a 10 year duration of abnormal growth. But what about Chipotle ? I would, in its present form use a 5 or 10 years but not a 15 years like what it was priced previously (before they changed CEO).

If you use a 15 year duration of Costco, you will find the fairvalue is between $650 - $750. Of course if you are vary bullish, you could use a 20 year valuation on costco, you will find that it is fair valued. But since i am a scaredy cat, i will only assume a 15 year duraton for Costco.

To be conservative, i will start buying a bit at Costco at at 7xx+ price, at fair value. And more earnestly at lower prices.

If you use the same logic, you will find that moat strength can be explained for many high P/E companies, in terms of duration of the moat .

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