Costco Is No Bargain Stock

The warehouse club is really rolling. Too bad its stock is so pricey

   

Let me make this perfectly clear: I love Costco (NASDAQ:COST). Being a member of the Order of Freak Comparison Shoppers, I have conducted comparative analysis on buying stuff at Costco versus at regular shopping outlets, and Costco’s bulk products usually cost 30% less. So if you shop there enough each year, it more than pays for the annual membership fee.

And even if you don’t, Costco still loves you because that membership fee goes straight to their bottom line.

That’s pretty much the big reason to love shopping-club stocks. If you want to get into one, you fork over some money. Only then can you enjoy the savings. Costco also announced it would be boosting these fees in 2012.

The other thing to love is how well Costco has executed over the years, particularly against giant Wal-Mart Stores (NYSE:WMT). It would be so easy for the company to have failed given the debt and cost incurred to open and operate giant warehouses, and have employees that are skilled in all kinds of departments — especially food service.

The other aspect about Costco is tremendous brand loyalty. Ask your friends if they shop at Costco. The ones that say they do will also say, “I LOVE Costco.” I’m always astonished at how long the gas lines are at Costco. The gas being sold there isn’t that cheap, and it isn’t 30% off. Yet people flock to buy gas there.

This whole plan works really well for the company. Costco is sitting on $5.8 billion in cash, offset by only $1.3 billion in debt, and with plenty of free cash flow (almost $2 billion per year). Q2 earnings came in 14% higher than last year, on a sales increase of 10%, and same-store sales increases of 8%. That last number in particular would make any retailer salivate.

There’s only one problem: Costco’s stock price. Its products may be discounted, but its shares sure aren’t. Even if you back out the $10 per share in cash it holds, giving it an effective stock price of $77, it trades at 20x this year’s estimates, with this year’s growth rate pegged at 17% and next year’s at 14%.

I’m willing to give Costco a premium, but not that much. If the stock drops back into the mid-$60s, it’s a buy. Otherwise, I’d hold onto it and enjoy the giant packages of candy it sells.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/costco-is-no-bargain-stock/.

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