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2017 Looks to Be the Year Costco Gets Back on Track

Stock (Symbol)

Costco (COST)

Stock Price

$162

Sector
Retail & Travel
Data is as of
January 14, 2017
Expected to Report
Mar 2
Company Description
costco_logoCostco 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
David Sharek2017 should be a solid year for Costco (COST) as analysts see profit growth accelerating from 1% to 11%. Costco has been hurt from low gas pump prices, a high dollar, and deflation in food prices and hardlines. But profit growth looks to accelerate this year. Costco is the 2nd largest global retailer, with 715 warehouses worldwide serving 48 million households. It has stores in Canada, Mexico, the UK, Taiwan, Korea, Japan, Australia and Spain, with expansion opportunities in China as well as India. The profit Costco makes mirrors the annual membership fees it brings in. In fiscal year 2016 COST delivered a 11% gross profit margin, got 2% from memberships, spent 10% on selling, general and administrative fees, paid 1% in taxes and made 2% after taxes.  The cost of membership should rise in late-2017, as the company usually raises this price every five years. Costco launched its Anywhere Card from Citi/Visa during May and June of last year and now customers can use any Visa card in store, which in turn increase transactions and lower credit card fees. Big stock buybacks help Costco achieve double-digit profit growth on single-digit sales growth. Management bought back half a billion dollars in stock during fiscal year 2016. This is one of the world’s safes stocks with an Est LTG of 10% per year plus a 1% yield. Its low prices ensure a strong and steady legion of customers, as 9 of 10 renew their memberships each year, thus the P/E is usually in the high-20s. Right now COST’s P/E is just 25 and with profits growth set to accelerate, 2017 should be a good year for Costco.
Profit growth clocked in at 7% last qtr on a 3% gain in sales. Profit growth missed the 10% analyst estimate. Same store sales increased 1%, but would have been up 2% if it weren’t for the negative effects of gas prices and F/X. The company opened 29 warehouses in 2016 to bring its total to 715. Annual Profit Estimates continue to deteriorate slightly each qtr. This qtr 2017’s estimate is $5.89, down a nickel from the $5.94 it was last qtr and 20 cents less than the $6.09 it was 4 qtrs ago. But qtrly Estimates look good, with 9%, 10%, 13% and 13% profit growth expected the next 4 qtrs.
Fair Value
My Fair Value on this stock is 27x earnings, which implies 9% upside this year. This stock had been overvalued for much of the last three years, and I find this is rare for COST to sell for 25x earnings. 
Bottom Line
Lower gas prices and a strong dollar have been hampering Costco’s growth, but things are looking up as profit growth is expected to accelerate from 1% in 2016 to 11% in 2017. Overall this is a sound company with a loyal customer base, and that makes the stock a safe selection for conservative investors. My personal opinion is the stock hasn’t moved for a couple of years and is due to head to new highs this year. COST ranks 20th of 30 stocks in the Conservative Portfolio Power Rankings.
Power Rankings
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Aggressive Growth Portfolio

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Conservative Stock Portfolio

20 of 30

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