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Costco Might Be Returning to Double Digit Growth

Stock (Symbol)

Costco (COST)

Stock Price

$150

Sector
Retail & Travel
Data is as of
October 16, 2016
Expected to Report
Dec 7
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 SharekCostco (COST) has been hurting from low gas pump prices and a high dollar, but now profits are expected to start growing in the double-digits again. During the last 4 qtrs COST’s profit growth has averaged 1%, but Estimates now call for at least 10% growth the next 4 qtrs. Costco is the 2nd largest global retailer, with more than 700 warehouses worldwide serving 47 million households. The company opened 23 locations in 2015, 29 in 2016 and have 31 planned for 2017. Costco 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. 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 make a 2% profit after taxes. The profit Costco makes mirrors the annual membership fees it brings in. The company increases the membership once every five years and that implies the price should rise in the next year or so (management wanted to finish the credit card switch before upping the card cost). Costco launched its Anywhere Card from Citi/Visa during May and June and now customers can use any Visa card in store instead of Amex. This switch should increase transactions as well as lower credit card fees. COST is a safe stock with an Est LTG of 10% per year plus a 1% yield. Its low prices ensure a strong and steady legion of customers, thus the P/E is usually in the high-20s. Right now COST’s P/E is just 25 and the stock is at a good entry point, especially with profit growth set to accelerate. The company bought back half a billion dollars in stock during fiscal year 2016 which just ended August 30th.
cost_2016_q3Last qtr COST had profit growth of 2% on sales growth of 2%. Same store sales were flat but were cut 3% from F/X and lower gasoline prices. The company beat the $1.74 profit estimate by 3 cents, which was the first time the company hadn’t missed all year — good. Still, annual profit estimates continue to erode a little at a time. This time 2017’s went from $5.99 to $5.94. Qtrly Estimates also fell 2 cents in each of the next 3 qtrs, but analysts still think profits will grow 10%, 10%, 10% and 12% the next 4 qtrs. P/E of 25 is good as it was 28 last qtr.
Fair Value
cost_2016_q3_phMy Fair Value on this stock is 27x earnings, which is a rich valuation. Still, that implies just 7% upside (plus dividend) in the coming year. In 2012 and 2015 management paid out a big bonus dividend. 
Bottom Line
cost_2016_q3_10yrCostco is a great investment for conservative retirement accounts, a perfect stock to buy-and-hold. Stable gasoline prices and the new Costco Visa should be a big positive for sales and profits going forward but the U.S. dollar might be a downer. Overall it looks like COST might be back to growing at 10% again as early as next qtr, but with a P/E of 25 the stock is already richly valued. COST ranks 24th of 35 stocks in the Conservative Portfolio Power Rankings.
Power Rankings
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Conservative Stock Portfolio

24 of 35

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