Costco Wholesale Corporation (NASDAQ:COST) is one heck of a great business. However, today’s earnings report is screaming that Costco stock is insanely overvalued.
Let’s take a look at all the numbers, though, because Costco stock is telling us a lot of interesting things about the company itself, and the state of the U.S. and international economies.
By digging into Costco earnings, we can get some indication of what we might expect for the future of Costco stock — and when the right time to buy in might be.
COST Earnings — The Good and the Bad
First of all, let’s marvel at the $25.52 billion in quarterly sales which, although only a 1% increase over last year, is still twenty five billion dollars. That’s a $100 billion annual run rate, and it demonstrates the power of the COST brand.
To give you a sense of scale, Amazon.com Inc. (NASDAQ:AMZN) had $89 billion in annual sales last year. So this brick-and-mortar operation is pulling in more than the Internet’s greatest retailer.
Now, the EPS is not exciting at first glance. Earnings came in at $1.17 per share, which was up only 10% form last year’s $1.07. While that was a one-cent beat on EPS for Costco stock, the top line missed by $1.1 billion. That’s one factor as to why Costco stock slid slightly on Thursday.
For any retailer, the same-store sales number may be the most important metric. It’s a measurement of how stores that were already opened performed, so it removes new stores from the sales calculation that may muck up the appearance of the actual organic growth of the company itself.
Same-store sales is where you will see the dramatic impact of lower gas prices (which drives a lot of the P&L for COST) and foreign currency effects because of the strong dollar. Not including these effects, U.S. same-store sales increased a very respectable 5% for the quarter, and 7% for the 36-week period. Internationally, the quarter and thirty-six week period both saw strong 7% increases when adjusted for currency effects. Combined, adjusted comps rose 6% in the quarter and 7% so far this year.
However, once we factor in gas prices and forex issues, U.S. same-store sales were only up 1% in the quarter and 4% so far this fiscal year. International comps fell 6% in the quarter and fell 2% for the year. Combined, comps fell 1% for the quarter and only rose 2% for the year.
Bottom Line for Costco Stock
Neither of the situations is going to change. Gas prices will stay low for awhile and the dollar will remain strong. Costco earnings will thus be affected for some time to come, because 200 of its 673 warehouses are located in other countries.
Nevertheless, Costco stock remains unbearably expensive. With FY15 estimates at $5.24, up 13% from last year, the stock trades at 26x FY15 earnings, which is a PEG ratio of 2. Even if I grant 10% premiums for its global brand name, its $6.7 billion in cash on hand, and strong free cash flow, I can’t justify paying more than 18x.
COST is a great company, but for now, Costco stock is insanely overvalued. I couldn’t even think about buying it unless it fell below $100.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long AMZN. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
