Experts Top 5 Safety Stocks For 2024

Most grocers are thrilled to grow revenues by mid-single digits.

No wonder they all envy Costco’s (COST) 11% average 5-year growth.

Despite a recent pullback, shares of the membership-based retailer are up +11% year-to-date, more than twice the sector average.

Financial pros always include it in their top five discount store stock searches and rarely leave it outside of the top two.

Right now, it’s #1.

Yet, the stock trades at 46x earnings and 31x cash, making it rather expensive.

That hasn’t mattered in the past.

But here’s why we think it should matter now.

Costco’s Business

The 3rd largest global retailer, Costco runs 874 warehouses (mainly in the U.S. and Canada).

These mammoth stores serve 73.4 million households and 132 cardholder who renew at an annual rate of 92.9% while generating $4.7 billion in anual membership fees.

Costco’s business model takes consumer goods and services, marks them up 10%, and sells them to club members who pay an annual fee.

This helps the company keep margins fairly consistent.

Beyond traditional grocery items, Costco sells everything from televisions to travel.

Members can pick up prepared food at the warehouses and explore Costco’s Kirkland private label.

Every year, the company adds new brands to its portfolio including those below:

Source: Costco Q2 2024 Investor Relations

Financials

Source: Stock Analysis

As we noted earlier, Costco’s has been phenomenal.

The company’s three and five-year sales CAGR sits at 11%. That’s higher than its average, which is still a respectable 7%.

With its cost+ business model, Costco maintains relatively stable gross margins.

In recent years, the company’s focus on efficiency has slightly improved profit and free-cash-flow margins.

Incredibly, Costco has kept its debt to negligible levels.

Valuation

Source: Seeking Alpha

As far back as we can recall, Costco has traded at a premium valuation to its peers.

Its price-to-sales ratio is the only one of the discount retailers over 1.0x.

True, the price-to-cash flow ratio is ~3x all its peers.

However, Costco has delivered more consistent sales growth and profitability.

Its low debt profile certainly helps with that.

But do you really want to pay for a stock that trades at 30x cash?

Even if you net out the assets minus liabilities from the market cap, the stock still trades at 29x cash.

Growth

Source: Seeking Alpha

One of the worries facing analysts is the possible slowdown in sales.

Sales growth is expected to hit just 6.3% next year, about half the average from the last few years.

That’s above all its peers, but not by much.

And free-cash-flow has declined over the last few years as well.

Profitability

Source: Seeking Alpha

Costco’s margins might not look as impressive on a standalone basis as other discount retailers.

But they’re still rock solid.

And its return on equity and total capital is fantastic.

Our Opinion 6/10

Costco is a great company with an envious business model.

It’s just an expensive stock.

While that’s typical for the company’s history, we can’t argue it’s worth buying when its shares are this expensive.

But lop off a third of the share price, and now we’re talking.

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