Is Costco’s Stock Too Expensive to Buy?

Grocery isn’t meant to be a sexy business. But it’s hard to find Costco (COST) attractive.

A typical retailer in the sector has a stellar year if revenues grow 3%-4%.

Costco’s 5-year average is 11%.

That’s why the stock trades a a hefty premium to its peers.

But financial pros keep putting Costco as their top discount retailer stock search month after month.

So, we decided to evaluate the company beyond just buying their pizza (which is delicious).

Costco’s Business

Costco may be the 3rd largest global retailer. But they keep things simple.

They charge an annual membership fee, add 10% to the price of goods, and that’s it.

Here are some key stats:

• 72 million households
• 129.5 million cardholders
• A 92.8% membership renewal rate
• 870 warehouses, with 509 in the U.S. and 107 in Canada

Shoppers gain access to discounted items on everything from food to vacations, furniture to jewelry.

Revenues are reported by geography and merchandise category:

Source: Costco 2023 Annual Report

In conjunction with the company’s recent quarterly results, the board declared a special $15 per share cash dividend to shareholders of record as of December 28. This is the first time since 2020 they’ve done this when they announced a $10 per share special dividend.

Financials

Source: Stock Analysis

Costco’s cult following helped propel its sales, with explosive revenue growth in 2021 and 2022.

Margins are small but consistent thanks to a streamlined business model with world-class logistics.

Notably, cash flow improved, with $13.1 billion in operating cash flow, with the latest quarter at $4.7 billion, almost twice as high as the same quarter last year.

Surprisingly, Costco holds very little debt. In fact, they have $8.5 billion more cash on hand than total debt.

Valuation

Source: Seeking Alpha

All this Costco goodness doesn’t come cheap.

Shares trade at over 43x forward earnings, with competitors like Target (TGT) and Dollar General (DG) only around 16x-17x forward earnings. However, Walmart trades at over 28x forward earnings.

Similarly, Costco trades at 23x cash, higher than any of its peers by almost double.

Growth

Source: Seeking Alpha

Our concern is you’re paying for historical growth. Costco’s forward revenue growth is on par with Walmart and Dollar General.

However, Costco’s forward EBITDA and EPS growth are projected to exceed its peers. So, whatever they lack on the top line, they’re making up in cost savings.

Profitability

Source: Seeking Alpha

Interestingly, Costco’s profitability is one of the lowest in every category. However, its cash flow margin is at the top.

This implies they efficiently use their assets to generate profits, which is backed up by their return on assets.

Our Opinion 6/10

While Costco is a great company, we’re hesitant to pay for tepid forward guidance.

If shares were to shave off about 25%, then we’d happily step in.

Until then, we’d rather watch from the sidelines.

• The Backdoor AI Play
• Are Alternative Investments a gray area? The Alt can add some color
• Lucid Motors Stock: What Went Wrong With This ‘Tesla Killer’?
• Insider Buying: C-Suite EV Executive Just Loaded Up on $2M of this Auto Stock