Stock (Symbol)

Costco (COST)

Stock Price

$167

Sector

Retail & Travel

Data is as of

July 14, 2016

Expected to Report

Sept 29

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 (COST) has been negatively affected by low gas pump prices and a high dollar, but those headwinds are subsiding. The big news is the Costco Anywhere Card from Citi/Visa rolled out its new Visa card during May and June and now customers can use any Visa card in store instead of just AmEx. This should increase transactions as well as lower credit card fees. COST is expected to have just 1% profit growth this year (fiscal year ending August 30th), but things are expected to pick up two qtrs from now as analysts predict profit growth of 13% next year. Costco is the 2nd largest global retailer, with 705 warehouses worldwide serving 47 million households. In fiscal year 2015 COST delivered a 11% gross profit margin, spent 10% on selling, general and administrative fees, and got 2% from membership fees to made a 2% profit after taxes. The company has around 50 stores in Taiwan, Korea, Japan and Australia combined, and has the ability to double that. China and India are also expansion opportunities. Long term, analysts have a 9% Estimated Long Term Growth Rate on the stock, and the company pays a 1% dividend. COST is a solid investment for conservative accounts, but you have to pay up for quality, as the stock has a P/E of 28.

Profit growth has been slow the last year, but now there’s light on the horizon — a lot of light. Profit growth the next four qtrs is expected to be 1%, 12%, 11% and 11%. That would be a return to double-digit profit growth. It’s obvious investors anticipate this as the stock’s near an All-Time high. But with a P/E of 28 I don’t expect the shares to charge higher.

Fair Value

COST is a safe investment. Other than the recession of 2008-2009 the stock rose steadily the past decade, with the only down year in profits coming in 2009. In 2012 and 2015 management paid out a big bonus dividend. My Fair Value is 27x earnings, which around is where the stock is now.

Bottom Line

Costco is a great investment for conservative retirement accounts, a perfect stock to buy-and-hold. The new Costco Visa should be a big positive for sales and profits going forward as analysts predict the company will return to double-digit profit growth. The only negatives are the 9% Est LTG and the 28 P/E. But you have to pay up for quality. Still, since the stock sells at around my 2017 Fair Value, it’s ranked just 34th of 38 stocks in the Conservative Portfolio Power Rankings.