Costco Wholesale Corporation Crushes Earnings, But Don’t Buy Here

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COST stock - Costco Wholesale Corporation Crushes Earnings, But Don’t Buy Here

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Anybody worried that big bad Amazon.com, Inc. (NASDAQ:AMZN) would somehow challenge Costco Wholesale Corporation (NASDAQ:COST) does not have to worry. The things consumers purchase at Costco are in bulk, including consumables, and Amazon cannot ship enormous packages without it being cost prohibitive.

So it’s no surprise that Costco earnings were amazing this quarter. Not only were they amazing, they were freakishly incredible, to the point that I can barely believe it. It’s the comparable store sales that crushed everything, with comps that I haven’t seen in ages from any business.

U.S. comparable sales increased an astonishing 10.3% If we back out gasoline and currency effects, comps came in at a fantastic 8.7%. Meanwhile, Canada came in with 4.3% comps. Everywhere else delivered 8.2%. When you wrap it all up, backing out gas and forex, COST stock ended with a fantastic comp sales number of 7.9%.

The 7.9% comps were split with a 5.9% global traffic increase and 2% increase in the average ticket.

This led to sales for the first quarter of $31.1 billion, a 13.3% increase from last year’s $27.5 billion, and net income for the quarter of $640 million, up 17% YOY. Can you believe that even after all these years (and the size of Costco’s market cap), COST stock is still growing earnings at a 17% clip? I can’t.

The backbone of COST stock is its membership fees, which came in at $692 million, up $62 million or 10% YOY. A small portion of that increase ($24 million) came from the fee increase earlier this year. Back that out and COST stock still had 6% growth. Also, Costco continues to have a very loyal customer base, with 90% of member renewing in the U.S. and 87% globally. Costco now has 50 million members.

Meanwhile, COST continues to expand, planning 20-25 new stores in the next year, with half in the U.S., three in Canada, two in Korea and one each in Australia and Mexico.

Costco still has excellent financials. It has $7.7 billion in cash and $6.5 billion in debt. It continues to pay its little dividend and repurchased about 3 million shares of stock at an average price of $158 per share this fiscal year. I don’t love that use of capital because I think COST stock is rather expensive.

Speaking of that, here’s what I find in terms of valuation. COST stock trades at an $81 billion market cap, and TTM earnings were $2.7 billion. That means COST is trading at 30x earnings. Now, there are two ways to view this valuation. The first is that Costco grew EPS 17%, so a 17x multiple would make sense. A very liberal valuation approach would be to say that Costco has a world-class brand name, great cash flow and a strong cash position and deserves a 10% premium for each, which might mean a 22x estimate is reasonable.

Additionally, since it is a growth stock at this point, a PEG ratio of 1.36 is not terribly expensive. Growth stocks with a PEG ratio of up to 2.0 might be reasonable.

Analysts, however, only see 10% annualized growth over the next five years. That would lower the premium-enhanced valuation to 13x, and give a PEG ratio of 2.3. That’s expensive. Considering the market is already overheated, at its second most expensive in history, I would be leery about buying or adding here.

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.


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