Shares of Costco Down On Amazon Whole Foods

Stock (Symbol)

Costco (COST)

Stock Price

$151

Sector

Retail & Travel

Data is as of

July 11, 2017

Expected to Report

Aug 30

Company Description

Costco Wholesale Corporation is engaged in the operation of membership warehouses in the United States and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, Spain, and through its subsidiaries in Taiwan and Korea. As of August 28, 2016, the Company operated 715 warehouses across the world. The Company’s average warehouse space is approximately 144,000 square feet. Source: Thomson Financial

Sharek’s Take

Costco (COST) is down due to Amazon’s interest in acquiring Whole Foods. That stinks because COST just delivered a solid qtr with 13% profit growth and 5% same store sales growth (SSS). That’s a solid SSS figure, but investors are fearful of Amazon eating into Costco’s profits. Costco is the 2nd largest global retailer, with 728 warehouses worldwide serving 50 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. On June 1 Costco raised its membership fees $5 for individual and business accounts, $10 for executive memberships — and this will be a nice boost to profits. Management bought back half a billion dollars in stock during fiscal year 2016. Big stock buybacks help Costco achieve double-digit profit growth on just single-digit sales growth. The stock has an Est LTG of 10% per year plus a 1% yield (5% this year due to a surprise dividend) and sells for 24x earnings (2018 estimates, as COST has a Aug 31 fiscal year end). This is one of the world’s safes stocks. 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 around 28. Now with a 24 P/E the stock is on sale, but the threat of Amazon looms. I think this is a good time to buy the stock, as COST doesn’t really mark up goods to make a profit anyway — the profit is in the membership fees which rose 4% last qtr and could rise even more net qtr with the price increase taking effect.

Nice 13% profit growth last qtr, which whipped the 5% estimate. Sales rose 8% and same store increased 5% — both good figures for this large company. Estimates are for 12%, 11%, 20% and 11% profit growth the next 4 qtrs, which is solid. The P/E of 24 is low too when we look at the stock historically.

Fair Value

I’m bringing down my Fair Value P/E from 27 to 26. That gives the stock 10% upside for the next year. Not bad.

Bottom Line

Costco has been a solid stock to own the past decade, as it rose 11% per year on average. Low gas prices and a rising dollar have hampered profits the past few years, but now both are turning the other way and profitability is rising. I feel Amazon still has a ways to go before it can hurt Costco, and Whole Foods hasn’t even agreed to be acquired yet. This is a good area to pick up the stock, as it sells for just 24x earnings — which is low historically. With profits looking to grow in the double-digits the next 4 qtrs, I’m loving COST up in my Conservative Portfolio Power Rankings from 24th to 14th.