Costco Is Down Based on Economic Fears, But It Looks Cheap Now

Costco Wholesale (NASDAQ:COST) has had a rough time since the end of 2021. After peaking at $567.77 on Dec. 29, COST stock has tumbled to a close of $483.47 as of Jan. 26, 2022. However, investors may become interested in the stock once more. The shares look cheap again.

A Costco Wholesale (COST) warehouse in Auburn Hills, Michigan.
Source: ilzesgimene / Shutterstock.com

As a result, investors now see that, given the recent quarterly results, not everything is really as bad as it seems with Costco. Even in light of the recent market downturn.

Here’s what you should know about COST stock moving forward.

COST Stock: Where Things Stand

On Dec. 9, Costco reported stellar fiscal first-quarter results for the period ended Nov. 21. Revenue was up 15% on a total company basis year-over-year (YOY). Moreover, the company’s online sales were up 14.3%. Even not including the volatile gasoline sales, its total revenue was up almost 10% YOY.

In addition, Costco is still very profitable. Its earnings per share (EPS) figure was up 13.7% on a YOY basis to $2.98 per share. That was an increase from $2.62 last year.

On top of this, the company’s free cash flow (FCF) is also very high. For example, the company’s latest 10-Q report shows that it produced $3.26 billion in operating cash flow. After deducting $1.06 billion in capital expenditures (capex), its FCF for the quarter was $2.2 billion.

This is important since it represents about 4.4% of its quarterly $50.36 billion in sales. On the one hand, that is good since the FCF margin is positive. But on the other hand, it is not that high of a margin. At least, it’s not high compared to technology stocks. Still, for retail comps, this is a good FCF margin.

This will help us estimate the value of COST stock.

What Costco Stock Is Worth

Analysts now forecast that, for the year ending August 2022, sales will rise more than 11% to $217.8 million, according to Yahoo! Finance. And for the year ending August 2023, they forecast sales will rise 8% to $235 billion.

Therefore, if we assume that FCF will average 5% of future sales ending August 2023, free cash flow could rise to $11.75 billion. That figure can be used to estimate the company’s future value.

For example, if we assume that the market will eventually give COST stock a 5% FCF yield, the future value for the company is $235 billion. The way we estimate this is by dividing $11.75 in future FCF by 5%. That division results in a valuation of $235 billion.

This is also the same metric as multiplying FCF by 20 times, since the inverse of 0.05 is 20 (i.e., 1 / 0.05 = 20). In other words, using a multiple of 20 to value the company’s free cash flow puts it on a value of $235 billion.

Now, as Costco has a market capitalization of $211.6 billion today according to Seeking Alpha and $219.1 billion according to Yahoo! Finance, its value is much higher.

This implies that Costco is worth at least 9% higher than the average market cap of $215.4 billion. That puts the value of COST stock at about $527 per share, or 9% over the Jan. 26 close price.

What to Do with COST Stock

Analysts are more positive on COST stock than I am. For example, Seeking Alpha’s survey of 35 analysts shows that their average price target is $556.86. That is over 15% higher than the Jan. 26 close price. Compare that to my 9% higher price target of $527 per share.

Moreover, Tipranks has a survey of 23 analysts whose average price target is $578.55 per share. This is almost 20% over the recent close price and is an even higher price target than Seeking Alpha’s. This is also significantly higher than my 9% higher price target.

This means that analysts who take a long-term view of Costco believe the current share price is way too cheap. Value investors should probably take a cue from these analysts. They should start to buy shares in COST stock or lower their average cost in the stock if they already own it.

On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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