Is Costco Wholesale Corporation (COST) the Next Target for Amazon?

COST stock - Is Costco Wholesale Corporation (COST) the Next Target for Amazon?

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Costco Wholesale Corporation (NASDAQ:COST) was my favorite retail stock before, Inc. (NASDAQ:AMZN) announced its blockbuster $13.7 billion acquisition of Whole Foods Market, Inc. (NASDAQ:WFM) last week and it remains so as Wall Street continues to debate the deal’s potential impact on the retail sector. The value proposition of COST stock is just that good and it may tempt AMZN to buy the company.

Is Costco Wholesale Corporation (COST) the Next Target for Amazon?
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Here’s why.

My family is a case in point. We rarely leave our local Costco without spending at least $150, even when we are planning to just pick up one of the chain’s famous $5 rotisserie chickens.

Maybe it’s the free samples that pave the way to COST’s grocery section or the prices on perishable food, which are hard to beat even when considering the bulk sizes that the 727-store chain sells. Then there are the services the company offers on travel, car buying and believe it or not coffins. Let’s not forget Costco’s well-regarded Kirkland store brands.

Costco Makes a Good Target

As I have argued before, the secret to the success of COST stock lies with the company’s unique business model, which relies on membership fees to generate most of its profits. That business appears to be doing fine.

As of the most recent quarter, the retailer reported $644 million in revenue from membership renewals compared with $618 million a year earlier. Although Deutsche Bank recently argued that AMZN-WFM will hurt membership renewal rates and Costco’s grocery business, I don’t see it.  

COST stock should be able to hold its own.

For one thing, Costco attracts a broad customer base of customers that would interest AMZN, including small business customers who buy supplies, such as printer cartridges and other office supplies. Comparable sales excluding gasoline and foreign currency rose 5% in the most recent quarter. That’s well above the 1.4% gain reported by Wal-Mart Stores Inc (NYSE:WMT) in its latest earnings and the 1.3% drop off reported by Target Corporation (NYSE:TGT).

An Amazon acquisition also makes sense as Costco has little debt, which is surprising given how well it compensates its workers. It’s debt-to-equity ratio is 0.40, well under WMT’s 0.63,  TGT’s 1.16 and Kroger Co’s (NYSE:KR) 2.19 figures. Furthermore, the company’s return on equity tops 23, which is better than most retailers.  

Bottom Line on COST Stock

Like AMZN, COST has little use in playing the Wall Street game. Costco CEO Craig Jelinek never participates on earnings conference calls, doesn’t give earnings guidance and rarely grants interviews to the media. Wall Street analysts have trouble figuring COST out and as a result, the stock can volatile at times.

Amazon CEO Jeff Bezos, though, followed the Warren Buffett path and decided to keep WFM CEO John Mackey running the organic grocer after the acquisition closes. Bezos could easily strike a similar arrangement with Jelinek.

Costco stock isn’t quite the same bargain as the chain’s $5 rotisserie chicken. Nonetheless, the stock is a buy both on the strength of its underlying business and the potential for an AMZN acquisition.

As of this writing, Jonathan Berr owned shares of Costco.

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