Costco Stock Is Too Pricey for Anyone Other Than Long-Term Investors

On a price-to-earnings basis, Costco Wholesale (NASDAQ:COST) stock opened for trade recently at nearly 39. Microsoft (NASDAQ:MSFT) was selling for 38 times earnings.

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On the surface it makes sense. Costco sales for the May quarter were up 21% from the same period a year earlier. Profits were up 45%.

The latest revenue estimate, for the quarter ending in August, is $59 billion.

But look more closely. Costco’s fourth-quarter is 16 weeks. Its third-quarter was 12 weeks. Discount that fourth-quarter estimate by 25% and you get $44 billion. Revenue for the 12-week third quarter was $45 billion.

There’s nothing dishonest here. This is just how Costco does things, but if you’re expecting a huge payday after the August numbers are reported, you’re going to be disappointed.

A Closer Look at COST Stock

Costco has always lagged in e-commerce. It was late getting into grocery pick-up, although that move looks smart now. Costco’s same-day delivery service is managed by Instacart. Its two-day delivery service on non-perishables is free only with a $75 order minimum.

There’s a reason for this. Retailing is about breaking bulk. Stores like Walmart (NYSE:WMT) and Kroger (NYSE:KR) do that in the store when they stock shelves. Costco doesn’t do that.

For most items you’re buying in the same quantities the grocers buy. You’re the one breaking bulk. Costco turns your kitchen or freezer into a store. If you like barbecue, be prepared to buy 20 pounds of boneless butts.

As I’ve said even when boosting Costco stock, Costco isn’t for everyone. It costs $100 million and more to open a single store. The company doesn’t go into busy city centers. It goes to upscale suburbs where homes are big enough to store the quantities that it carries.

I love Costco. A favorite memory of my late father is his introducing me to Costco in the 1970s. We’ve been members for decades. My membership card shows a young man with a red beard. I’m 66.

Low Price Police

Costco likes its reputation of being the “low price police.” A vendor who gives another chain a better price is quickly dropped. Selection is also limited, to just one or two choices per category.

Costco’s store brand, Kirkland, offers quality equivalent to national brands because it’s supplied through those brands. There’s a whole cottage industry of publications telling readers how to save more there.

A recent letter to the Journal of Internal Medicine said Costco’s procurement policies are even better than those of the government.

Taxpayers would have saved $2.6 billion on generic drugs, just in 2018, if it handled purchases the way Costco does.

The Bottom Line

Unlike other retailers, Costco reports numbers each month. The report for June was spectacular. Total sales were up 14%, but look closely. Excluding gasoline, and impacts of foreign exchange, sales were up just 8%.

Costco is opening stores at the rate of one each week. Most these days are either international or in the heart of “Walmart country,” in Little Rock and outside Oklahoma City. There’s a limit to the number of suburban locations Costco will reach, and it’s risk-averse due to the costs.

That means COST stock may be hitting a short-term peak. Inflation has boosted the top line and re-opening has boosted the bottom line. In a normal quarter, Costco profits are close to the total of its membership fees. In the most recent quarter membership fees were $901 million. Net income was $1.22 billion.

If you’re looking 10 years out, COST stock remains the outstanding retailer to buy. Based on its current valuation, though, I’d buy Microsoft instead.

On the date of publication, Dana Blankenhorn held a LONG position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.


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