Stock (Symbol) |
Costco (COST) |
Stock Price |
$161 |
Sector |
| Retail & Travel |
Data is as of |
| October 22, 2017 |
Expected to Report |
| Nov 29 |
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 |
 There’s a lot of hoopla right now about Amazon digging into Costco’s (COST) business. But inside the numbers Costco is doing quite well. Last qtr COST did 18% profit growth on 16% sales growth, including 6% same store sales growth. Online sales jumped 27% as online sales were $4.6 billion. That’s a big number, but just 11% of the $42.6 billion in total sales for the qtr. Costco is the 2nd largest global retailer, with 741 locations worldwide (as of fiscal 2017) including 26 new buildings during the year and another two relocations. Costco serves 50 million households 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. 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 and occasionally deliver big one-time dividends. COST is one of the world’s safest stocks. Its low prices ensure a strong and steady legion of customers (as 9 of 10 renew their memberships each year). Amazon’s acquisition of Whole Foods has hurt Costco in the multiple. That is the multiple of years worth of profits investors will pay for COST, (the P/E). This stock used to have a P/E of 27. Now it has a P/E of 25. Also, profits are growing faster than they have in a while due to good F/X trends. So I do agree with investors that the stock is worth 25x earnings, and feel COST is fairly valued at this time. But I wouldn’t give up hope on the stock as management is savvy, efficient, and will figure out an online strategy. In October it launched CostcoGrocery, a 2-day delivery service for items that don’t need refrigeration, and Instacart white label, with same-day delivery on 17,00 SKUs. Overall I feel the stock will provide safe long-term 10% to 12% total returns for conservative investors. |
 Nice pick up in profit growth that last couple of qtrs. But profits were restricted the past couple of years as the strong dollar and low gas prices messed things up. This stock was in an uptrend higher, then got smacked when Amazon declared it wanted to buy Whole Foods. COST has beaten the street by a good margin the last 2 qtrs and Estimates call for profit growth of 13%, 19%, 11% and 4% the next 4 qtrs (I expect this last figure to climb). These numbers look good, I think everyone is overreacting. |
Fair Value |
 During the last three qtrs I’ve brought my Fair Value from 27x earnings to 26x and now 25x. And the company just closed out fiscal year 2017 so this $161 Fair Value I have is for the next year. So although the stock is down, it’s not undervalued in my eyes. |
Bottom Line |
 Costco has been a solid stock to own the past decade, and the recent pullback hasn’t changed the upward trend on the ten-year chart. Yes Amazon is a concern, but I feel that’s baked into the stock with the lower valuation. And I’m confident management will deliver a solid online strategy as it excels with low prices. COST ranks 26th of 32 stocks in my Conservative Portfolio Power Rankings. This is a core holding for conservative accounts. |
Power Rankings |
Growth Stock Portfolio
N/AAggressive Growth Portfolio N/AConservative Stock Portfolio 26 of 32 |
