Stock Isn’t Cheap Like Its Items Are

Stock (Symbol)

Costco (COST)

Stock Price

$146

Sector

Retail & Travel

Data is as of

October 5, 2015

Expected to Report

Dec 9

Company Description

Costco Wholesale Corporation (Costco) is engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, and through majority-owned subsidiaries in Taiwan and Korea. The Company operated 663 membership warehouses and an average warehouse is approximately 144,000 square feet. The Company’s warehouses generally operate on a seven-day, 69-hour week. The Company’s product categories include Food, Sundries, Hardlines, Fresh Food, Softlines, Ancillary and Other. The Company’s online business provides products, which include services, such as photo processing, pharmacy, travel, business delivery, and membership services. Source: Thomson Financial

Sharek’s Take

Costco’s stock isn’t cheap like the items in its warehouse stores are. Although it’s only growing profits around 10% per year, the stock has a P/E of 25. That seems really high, but when you look back the stock’s had a median annual P/E in the 20s the entire decade. Investors obviously see a quality company and don’t mind paying more for it. COST has a top safety rating of 1 from Value Line and has a Beta of just 0.80, which means the stock is less volatile than the stock market (which has a Beta of 1.00). With Costco’s fiscal year-end being August 31st, I’m already looking to 2016 when calculating the P/E ratio, which again is 25. Costco is a safe dependable stock that you can buy-and-hold and potentially make a 11% total annual return with. It isn’t cheap, but provides safety and stability for conservative investors.

One Year Chart

This is a QUALITY company. Perfect for conservative investors. Except for the recent growth. Profits have grown just 9% in the last 2 qtrs as sales have been around what they were last year. Estimates show 4%, 4%, 11% and 6% profit growth the next 4 qtrs. Now COST has been beating the street, but this isn’t even double-digit growth and the stock has a P/E of 26. That’s why the stock is basing.

Fair Value

Costco has grown profits 9% a year the past decade, and analysts expect 10% going forward. The company pays a dividend of 1% a year so this looks to be an 11% grower. Notice all decade COST has had a P/E in the 20s. So 25x earnings is normal for this stock. With the company entering the 2016 fiscal year on November 1st, we are looking at a Fair Value of $141. Also, these charts and tables were done on 10/5 when the stock was $146. Today, 11/4, it’s $158. So COST could be this price two years from now.

Bottom Line

Costco is a tremendous company, and the stock is one you can buy and hold for many years to come. The negative is COST is always expensive. What makes matters worse is profit growth is in the single-digit range right now, so there’s not a lot of momentum here. Still, this stock provides safety and stability for conservative investors who would love to earn a 10% return.

COST ranks 21st of 29th in the Conservative Stock Portfolio Power Rankings.