Analysis of the Key Variables Affecting Costcos Stock Price - Research Paper Example

Introduction

Costco Wholesale corporation is the largest membership-only warehouse club in United States. Costco is also the world leading retailer and this was after it overtook Walmart in 2016. As a publicly traded company, the following analysis seeks to establish some of the factors that affects the price of stock. The three variables that were chosen for the research are US/EU exchange rate, S&P Index, and 10-year Treasury bond interest rate. To evaluate whether there is a correlation between the three variables and the stock price, the analysis will adopt the use of Excel data analysis tool. To analyze the four critical variables, the analysis will adopt the use of Durbin-Watson coefficient which will be weighted so as to show whether a correlation exists. The weight of each variable will then be weighted to establish to individual net effect of each variable on the stock price.

One of the variable being analyzed is that of exchange rate which is crucial in understanding the behavior of stock prices. Costco Wholesale Corporation has a total of 729 warehouses worldwide with only 200 stores located outside the United States. The analysis of the revenue generated by the company shows that 70% of the total revenue is generated its primary US market. It is because of this that Costco cannot be really defined a global retailer. The European market is the 4th largest market for the company and thus there is a potential of the company being affected by negative forces stemming from the market.

The international expansion of Costco, more specifically to the international market opened it up to three exposures that are situated with the global market: operating exposure, transaction, and translation exposure (Dimitrova, 2005). Operating exposure is brought about by the change in the exchange rate, whereas the transaction exposure results from the settling of international payments and transaction in a dominating foreign currency. On the other hand, the translation exposure stems from the translation of a foreign currency dominated financial transaction into consolidated financial statements expressed in the US dollars.

The S&P index is stock market index that is based on American companies and it is evaluated from market capitalization of 500 large companies that are listed in NASDAQ or the New York Stock Exchange. It is a very crucial indicator of the U.S equities and it clearly shows how the stock market is performance at a given point in time. The other variable is the 10-year treasury bond interest rate. The 10-year treasury bond is a type of debt obligations that are issued by the government and it matures after a period of three years. Though it matures after a period of 10 years, the bond yields a fixed amount from an interest that is paid every six months. The interest rate that yields the amount is what we are referring to in the paper as the 10-year treasury bond interest rate. The effects of the treasury interest will be evaluated, so as to check if it exhibits a positive or negative relationship.

Data and Research Methods

To analyze the correlation between stock prices and the three prices, the paper will adopt data the spread out from January 2015 to august 2017. The data is very recent and thus the model and conclusion that will be arrived at is based on the recent influence of the three factors on stock price levels. The most important aspect while selecting the data was to ensure that the selected information was accurate and from official organization. It is because of this that the Treasury interest rate was adopted from the official treasury of the united states of America (Treasury, 2017). Analysis of the various data sources for the S&P variable revealed that there were some difference and thus to ensure accuracy, the data was sourced from the Federal Reserve Bank of St Louis (FRED, 2017). The US/EU exchange rates were also sourced from the Federal Reserve Bank of St Louis. The stock price historical data was sourced from Yahoo finance news for the years ranging from 2015 to 2017 (Yahoo Finance, 2017).

The four variables were grouped accordingly, with the US/EU exchange rates, 10-year Treasury bond interest rate, and the S&P INDEX forming the independent variable and the stock price being the dependent variable. To analyze the data accordingly, three methods were adopted, namely: Durbin-Watson coefficient method, One-way Analysis of Variance, and the use of linear regression to generate a coefficient equation that will show the magnitude with which the three variables affects the stock price value. The equation will be represented in the following manner:

Findings and Discussion

From the linear regression of the Durbin-Watson constant is 1.028, which is below 2.0. From this evaluation, we can establish that the three variables are positively correlated to the stock price. Appendix 1 has the model summary table which gives the Durbin-Watson coefficient. Reading the Watson table of significance, for 32 sample months and three variables, it was evaluated that the lower bound is 1.039 while the upper bound is 1.428. The evaluated value is clearly smaller than the lower bound value. As such, we can conclude that there is significant autocorrelation in the residuals.

Appendix 2 is the one-way analysis of variance, ANOVA table. Given that the total sample months taken for the analysis is 32, the total degree of freedom as shown by the table is 31, with the regression df being 3, and residual df is 28. The F-value is 9.872, and using the value, we can obtain the probability of obtaining the value by chance as 0.000131. The value indicates that out of the three independent variables, one of them or more has a significantly higher difference that the group mean difference. Analysis of the sum squares and Mean square from the second analysis shows that the S&P index has a great mean deviation from the group mean. It’s mean square is way too large and it clearly does not portray any direct correlation. However, From the coefficient table, it is clear that the S&P index contributes significantly to the overall stock price equation. From the coefficient table, the following coefficient equation can be generated:

Where Y=Stock Price, X1=Exchange Rate, X2=S&P index and X3=Treasury rate interest rate. The equation clearly shows that Exchange rate is the greatest factor that affects the stock price. The Treasury rate negatively affects the stock and the higher the 10-year US Treasury Bond interest rate, the lower the stock price. It is clear that S&P index affects the stock price the least.

Conclusion and Recommendation

The analysis reveals crucial information about Costco Wholesale Corporation. Firstly, the analysis showed that the exchange rate has the greatest impact on the stock price of the firm. On the face value, the firm should not be affected by the US/EU exchange rate. This is because the EU market is one of the smallest market of the company. However, the change in exchange rate can be viewed as an economic indicator that points at factors such as the price level, and the overall economic performance of the company. A strengthening currency is indicative of an overall economic growth, which means more money in circulation. With more money in circulation, the company is able to increase its profitability level and thus make it share lucrative and attractive to investors. It is because of this that the stock price increases.

The other factor that affects stock price significantly is the 10-year treasury bond interest rate. As depicted in the generated relational formula, bond interest rate and stock price move in the opposite direction. In general, over the years, the 10-year treasury bond interest rate has been having an upward trajectory, and keeping all the other factors constant, this has had a relative reduction in the stock prices of Costco. The reason for this relationship is brought about by the fact that the rise of the interest rates makes fixed income investments to be more attractive and most investors shift their money away from the stock market. Because of the increase in interest rates, stock becomes less attractive (Tepper, 2017). On the other hand, when the interest rates fall, bods become less attractive and investors direct most of their money towards stock, necessitating an increase in the price of stock

On the face-value, it is clear that the S&P index coefficients gives the impression that it contributes the least to the stock price, However, considering that the value of S&P as being in thousands, the net value got from the multiplication is huge. It is clear that the inclusion in the S&P index causes stocks of a company to increase significant. This is attributed to the fact that companies in the list of 500 are regarded as big leagues and thus most investors opt for companies that are in the list. In turn, the inclusion in the list increase the demand for a company’s stock and since the supply remains constant, the net effect is that stock price increases. This fact is brought out clearly in the case Diamond Offshore Drilling and Coty incorporation. A few hours after Diamond offshore drilling was dropped and Coty added, Coty incorporation registered a 5% increase in its stock price (Williams, 2016). However, after addition into the list, the change over the course time is not highly significant as the change of the index is not very significant over time.