I am neutral on Costco Wholesale Corporation (COST) because its incredible strength as a company and phenomenal track record appear to be fully priced into the stock at its current levels.
Costco is an American multinational corporation operating a line of membership-only retail stores across the globe. Founded in 1976 in San Diego, California, the company began operating under the name Costco in 1983 in Seattle, where it opened its first warehouse (the term used for its retail stores). The company’s headquarters are currently located in Washington state.
Strengths
Costco is one of the largest retailers in the world, with 804 warehouses across the globe and further plans for new warehouses. The company stocks all sorts of items, from food and drinks to home appliances, as well as liquor.
Costco is known for low prices and frequent changes in inventory, and has been gradually expanding its range of products. The company also has a private label, Kirkland Signature, that is sold at the warehouses and the website. It enjoys exceptionally strong loyalty from its customers and makes the vast majority of its profits from club membership fees. (See COST stock charts on TipRanks)
Recent Results
At the end of the fiscal year 2021, Costco reported a total net income of $5.007 billion, which shows a growth of about 18% from the previous year. The company’s total sales for the year stood at $192 billion, also reflecting impressive growth. Costco’s earnings per share went up from $9.02 to $11.27.
The membership statistics show a 91.3% renewal rate in the U.S. and Canada, with a total of $3.9 billion as membership income, constituting roughly 2% of total sales.
For the last quarter of the year, the company’s sales were at $61.4 billion, an increase of around 18% since the same quarter in the previous year. Net income and earnings per share also witnessed a 20% increase year-over-year in the fourth quarter.
Costco reported a total of approximately $7.5 billion in debt and $17.5 billion in shareholder’s equity. Dividends were initiated in 2004 at a $0.4 annual payout and are currently at an annual payout of $3.16, representing very strong dividend growth over that time period.
Valuation Metrics
Costco’s stock looks pretty expensive at the moment, as the EV/EBITDA ratio is 24x compared to its 5-year average of 16.7x. Furthermore, its Price to forward Normalized Earnings ratio is 42x compared to its 5-year average of 31.5x, and its Market Cap to Free Cash Flow is 44x compared to its 5-year average of just 10.6x. That said, Costco’s stock has gone up relentlessly over the course of its history despite appearing to be pricey in the past, so it is hard to bet against this stock.
Wall Street’s Take
From Wall Street analysts, Costco earns a Strong Buy analyst consensus based on 16 Buy ratings, 5 Hold ratings, and 0 Sell ratings in the past 3 months. Additionally, the average Costco price target of $520.85 puts the upside potential at 1.51%.
Summary and Conclusions
Costco has a fantastic track record of generating outsized shareholder returns. The company enjoys remarkable customer loyalty through its club membership program, has a strong balance sheet, and consistently grows its dividend by double-digits year after year. Furthermore, Wall Street analysts are overwhelmingly bullish on the stock and none are bearish on it.
That said, the stock price has been on a huge run lately and it now trades at multiples that are far above its historical averages. Even the bullish Wall Street analyst consensus price target indicates that the stock is trading at fair value today. As a result, investors might consider waiting for a pullback before adding shares.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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