Costco Wholesale Corporation Is Still Is Too Pricey to Buy

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Costco Wholesale Corporation (NASDAQ:COST) declined about 10% following its recent earnings release despite the fact that its numbers were pretty impressive. Let’s take a look at the numbers behind COST stock, pull them apart and see what they are telling the market.

cost stock

Q4 revenues were $41.4 billion, an increase of 15.8% from $35.7 billion last year. Revenues for the fiscal year were $126.2 billion, an increase of 8.7% from $116 billion last year. Net income increased nicely to $2.68 billion from $2.35 billion last year, an increase of almost 14%.

Now, let’s break into these a bit. First, mid-teens increases in revenue is fantastic to see. However, we want to make sure this was due to strong comparable store sales. If it is simply due to increase in store footprint, it can be misleading in terms of how robust actual business is.

COST Stock Challenges

Looking at those comps, backing out gas price and currency effects, comps were indeed strong. For the quarter, they were up 5.8% in the US, 4.8% in Canada, and 6% in all other areas. For the year, U.S. comps were up 3.7%, it was 3.8% in Canada, and 4.5% elsewhere. Averaging across the entire company, COST stock saw comp sales increase 5.7% in the quarter, and 3.8% for the year.

These are terrific numbers, especially since COST stock management also told investors that U.S. comps were up 7.1% in September and 7.2% internationally. This tells us that, between pricing power and foot traffic increases, Costco remains a powerful brand that continues to attract consumers to the stores.

The net income increase of 14% is also very impressive. That COST stock can continue to show this level of growth, given both its history and the threat from Amazon.com, Inc. (NASDAQ:AMZN), is impressive. It also buttresses the argument that Amazon can’t bust everyone’s party. People like shopping in bulk at Costco, end of story.

So why did COST stock decline? Apparently, investors got upset about an increase in membership fees. I don’t understand that reaction, because the increase is hardly going to dissuade people from joining. As it is, members renew at a rate of about 90%. They do this because they like the experience of shopping at Costco and they like the pricing.

The other possible catalyst was gross margins fell about 20 bps. That gets back to pricing. Okay, so gross margins fell a teeny bit. Costco doesn’t care much because they’d rather get more members as a result.

Another reason Amazon isn’t going to impact COST stock too much is that the company is making an effort to compete with its own online presence. E-commerce grew 20% YOY. It is about to expand its online grocery business by getting up to 500 non-perishable products made available for 2-day delivery anywhere in the US – free with a $75 purchase.

Cost also has a partnership with Instacart where it offers nearly 1,700 items for same day delivery across roughly 60% of its store base.

As for financials, COST stock has $5.78 billion of cash offset by $6.57 billion in debt, which barely costs it 2% in debt service.

The Bottom Line on COST Stock

COST stock has a market cap of $70 billion, so it trades at about 26x TTM net income. Therein lies the problem for this investor. Even giving it a generous 14 P/E ratio for its 14% net income increase, adding 10% premium each for its cash position, free cash flow and world-class brand name, I cannot justify paying more than 18x for Costco stock.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/cost-stock-too-pricey/.

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