Stock (Symbol)

Costco (COST)

Stock Price

$158

Sector

Retail & Travel

Data is as of

March 31, 2016

Expected to Report

Apr 7 – Apr 11

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’s fell for the 2nd straight qtr as low gasoline prices at Costco pumps and a high dollar hurt 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. Last qtr Costco had just a 3% sales increase, on a 1% gain in same store sales (SSS). But if you take out oil and the dollar, SSS would have been 5% for the qtr. I analyzed the USD this week, and it looks to me like the dollar might not hurt US corporate profits in the 2nd half of 2016, and that could be the reason many US multinationals are selling around their 52-week highs. Although Costco’s numbers don’t look good now, profit growth looks to climb into the double-digits three and four qtrs out. At 29x earnings COST is costly, but it’s always high as the company has a consistent revenue stream and a top safety rating. The stock also pays a dividend, the yield is 1% and occasionally pays special bigger dividends sometimes. Costco is a good stock for conservative accounts, but at this price the long-term appeal isn’t great.

One Year Chart

Costco has an estimated long-term growth rate of 9% and pays a 1% dividend for a hypothetical 10% total annual return. That’s good for a safe stock, but you have to pay a lot for it, as the stock has a P/E of 29. Estimates show 7% and 3% coming the next 2 qtrs, but in the following qtrs analysts have estimated 11% and 12% profit growth. Also, the weakening dollar might help COST beat the street later this year.

Fair Value

COST usually gets a high P/E, but lately the P/E has gotten even higher. I personally don’t think the stock is worth 29x earnings, but then again I was wrong not buying the stock a decade or two ago. My 2016 Fair Value is $145 and 2017’s is $164.

Bottom Line

I considered selling Costco this qtr, but feel with better growth on the horizon the stock could head higher and leave me behind. In the end this has been a solid stock that’s delivered 11% growth the past 10 years in addition to dividends, and my guess is the stock will continue to be a good one for years to come. The negative is the P/E is high. COST ranks 31st of 34th in the Conservative Portfolio Power Rankings.