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Costco Stock: Any Room for More Growth?
Stock Analysis & Ideas

Costco Stock: Any Room for More Growth?

Costco Wholesale Corporation (COST) has seen an amazing near-50% run-up in price since the low of its dip back in early March of this year.

Costco operates large membership-based warehouses mainly in the United States, but also in Canada and internationally.

The company is highly diversified in its offerings. It sells many things, ranging from food, appliances, gasoline, automotive services, apparel, and more.

However, the stock may be too highly valued by the market. Therefore, we are neutral on COST. (See Costco stock charts on TipRanks).

International Expansion Can Help Improve Margins

Where does most of COST’s money come from? In terms of revenue, 72% comes from the United States, 13% from Canada, and 15% from international sources.

However, when looking at the operating income (earnings before interest and tax) of the business, only 59% comes from the U.S., 18% from Canada, and 23% from international operations (as of February 14, 2021).

The low operating income percentage in the U.S. relative to revenue shows that it is more profitable outside of the U.S. This is interesting to note because COST has more growth potential internationally, where its footprint is much smaller.

Therefore, if international growth outpaces domestic growth going forward, Costco’s overall operating income margins could improve. This is consistent with the opinions of analysts, as the consensus is that operating income margins will increase to 3.5% in 2022, and 3.6% in 2023, from the 3.4% level at which they currently sit.

Lots to Like

For starters, its revenue has been consistently growing every year when looking at data going back all the way to 2006, with the exception of a small slowdown in the 2009 recession. Its five-year revenue CAGR is 10.5%, and looking forward, COST is expected to grow just under 8% in both 2022 and 2023.

Given its reputation of consistent growth, it wouldn’t be unreasonable to expect mid-to-high single-digit growth for a few more years after that.

Earnings per share growth has also been steady, and has grown at a very attractive 16.2% CAGR in the past five years, and is projected to grow in the high single digits for the next two years.

When looking at its returns on invested capital, COST excels as well. For the latest 12 months, its return on invested capital is 17.1%. Coincidentally, its five-year average ROIC is also 17.1%, and this figure has been very stable, indicating that competition is not chipping away at Costco’s returns. Its ROIC is high in general, and ranks well compared to most peers, with Walmart (WMT) and Dollar General (DG) having ROIC’s of 13.6% and 12.7%, respectively, but with Target (TGT) having a 21.9% ROIC.

High returns on invested capital will keep contributing to positive long-term growth as COST will be able to reinvest its profits at a high rate of return.

You can also look to COST’s stable gross profit margins to indicate that competition is not getting in its way. For the past 10 years, gross margins have hovered between 12.4% and 13.3%, a very tight and stable range.

Although this is a low margin compared to the consumer staples sector that has average margins of 31.1%, COST makes up for it with its very high revenue figure of $195.9 billion for the past year.

Wall Street’s Take

Turning to Wall Street, Costco has a Moderate Buy consensus rating, based on 14 Buys, six Holds, and zero Sells assigned in the last three months. The average COST price target of $483.17 implies 7% upside potential.

Final Thoughts

Costco is a reliable stock with high returns on capital, and an economic moat that should do well in the very long term.

However, we remain neutral on the stock because we think there are better opportunities elsewhere.

Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.

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