Low Gas Prices and High Dollar are Hurting Costco

Stock (Symbol)

Costco (COST)

Stock Price

$152

Sector

Retail & Travel

Data is as of

January 10, 2016

Expected to Report

Mar 2

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 profit growth was -3% last qtr as low gasoline prices at its pumps and a high dollar hampered profits. Although the warehouse club is mainly in America where it derives 75% of sales, it has expanded abroad with 15% of sales coming from Canada and around 10% from Mexico, the UK, Japan, Korea, Taiwan, Australia and Spain. Costco is a large mature retailer with a loyal customer base and gets growth mainly via same store sales increases. If you discard the lower gas and higher dollar, SSS rose 6% last qtr (6% in the US, 9% in Canada and 7% elsewhere). But once you account for gas/currency SSS came in at -1% (2% US, -9% Canada, -5% elsewhere). Profit estimates going forward also declined, and now just single digit profit growth is expected the next 3 qtrs. At 28x earnings COST stock is high, but it’s always high as the company has a consistent revenue stream and a top safety rating of 1 from Value Line. You’re basically paying 28x earnings for around 10% expected annual growth. The company pays a dividend, the yield is 1% and occasionally pays special bigger dividends in certain years. In March 2016 Costco will move its credit card business from American Express to Citi/Visa and thus lower merchant fees. Overall, Costco is a safe dependable stock for conservative investors, but profit growth is expected to average just 6% the next 3 qtrs and at 28x earnings the stock’s not on sale. Low gasoline and a strong dollar are holding this stock back.

One Year Chart

Costco’s Estimated Long Term Growth Rate just fell from 10% a year to 8% a year, which is a bummer as it takes the hypothetical total return from 12% a year to 10% a year. That 2% is a big deal when the stock has a lofty P/E of 28. Note along the bottom that qtrly profit growth has slowed from 19% 4 qtrs ago to -3% last qtr. Estimates also fell and now single digit growth is expected the next few qtrs. Oh, also, the company missed analyst estimates last qtr, so these estimates might come down.

Fair Value

My Fair Value on Costco is 25x earnings, which gives us a Fair Value of $138. The stock is selling for 28x earnings, thus I don’t see value at this time.

Bottom Line

Costco is a solid choice for retirement accounts — a stock you can buy and hold for many years to come. But with a P/E of 28 the stock is a little overvalued at this time as the anticipated total annual return is around 10% a year. COST ranks 31st of 35th in the Conservative Portfolio Power Rankings.