Stock (Symbol)

Costco (COST)

Stock Price

$169

Sector

Retail & Travel

Data is as of

April 13, 2017

Expected to Report

May 25

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) is paying out a special one-time dividend of $7 per share to shareholders who owned the stock on May 10th. The $7 will be payed this week. COST also pays a $0.50 qtly dividend, so shareholders should be receiving $9 per share this year — sweet! The company last payed a surprise dividend of $7 five years ago. 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 will raise 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 single-digit sales growth. The stock has an Est LTG of 10% per year plus a 1% yield (5% this year). 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 in the high-20s. But right now COST has a P/E of 30 as profit estimates have fallen 4 straight qtrs. I love this stock for conservative investors, but I would try and get it at a better price (after the $7 gets paid).

COST just missed profit estimates of 9% and had -6% profit growth last qtr. Ugh. More importantly Annual Profit Estimates have been sliding 4 straight qtrs — 2017’s from $5.99 to $5.94, $5.89 and now $5.67. That’s a major reason the stock’s P/E jumped from 25 to 30 since last qtr. Also, NxtQtr’s estimate just fell from 10% to 6%. The following qtrs show 12%, 13% and 21% profit growth on deck, but with estimates falling I don’t have much faith in that happening. Last qtr the company had sales growth of 6% and same store sales growth of 3%, which is what is normal for Costco.

Fair Value

My Fair Value on this stock is 27x earnings, which makes the stock overvalued a bit right now. Profits grew just 1% last year and are expected to rise just 6% this year, that’s holding the stock in check.

Bottom Line

Lower gas prices and a strong dollar have been hampering Costco’s growth for a while, but this qtr the company was expected to turn the corner — it didn’t. Instead profits fell. Ugh. But that nice fat dividend will keep people happy — for a little while anyway. Costco is a great stock for conservative investors, but the growth needs to pick up for the stock to move higher. With a 30 P/E the stock could be rangebound for a year. COST ranks 24th of 31 stocks in the Conservative Portfolio Power Rankings.