• Costco (COST) is up 7.1% year-to-date (YTD) but could rise significantly from here based on its huge sales growth.
• Costco’s March sales were up 17.1% on a comp basis, with U.S. sales up 19.1% YoY.
• Based on its FCF margin Costco stock could be worth 25% more.

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Costco Wholesale Corp. (NASDAQ:COST) announced on April 6 that its sales exploded during March. For the five weeks ending April 4, it said total sales were up 18.7% from a year ago. On a comparable sales basis (i.e., with the same stores counted in both periods), sales were up 17.1%. This augurs very well for COST stock and its valuation.

Its sales in March rose from $18.21 billion to $21.61 billion. As a result, Costco stock is up about 4% to $608.05 on April 7. So far this year it is up 7.1% and could rise significantly from here.

Costco Sales Are Skyrocketing

Costco previously reported on March 3, that its quarterly sales were up 16.1% for the quarter ending Feb. 13. Comparable sales were up 14.4%. And for the six months ending the same date sales were up 16.4%, including 14.7% on a comp basis.

As a result, it appears that Costco’s sales this quarter are accelerating. This could be the result of price increases, volume gains, or a mix of both. In other words, inflation and higher demand could be stoking these huge sales gains.

For example, comparable sales in the U.S. rose 19.1% on a year-over-year (YoY) basis in the latest month ending April 4. This was higher than the overall sales growth of the company, including its online sales, which typically are very high.

Estimates Going Forward

Analysts forecast that Costco’s sales will reach $220 billion for its fiscal year ending mid-Aug. 2022. That represents a potential 12.5% increase on a YoY basis from $195.93 billion last year.

However, with these latest figures, analysts are likely to raise their estimates higher.

People may be loading up on staples and large ticket items that Costco sells. They are expecting these items’ prices to rise much higher over the coming year. So this type of buying is not so much from growing demand but from a desire to move planned purchases forward to the present.

The Department of Labor last reported on March 10 that the consumer price inflation (CPI) index was up 7.9% in February. It is set to report the next update for March CPI on or about April 10 or April 11.

If that figure is even higher, buyers may continue to boost sales at large stores like Costco.

Based on the company’s latest cash flow statement, its free cash flow (FCF) was $1.881 billion for the 24 weeks ending Feb. 13. That represents 1.84% of its $102.3 billion in sales.

So assuming its FCF margin reaches 1.9% of its forecast $220 billion in sales, FCF should hit $4.18 billion this year. We can use that to value COST stock.

Where This Leaves COST Stock

I suspect that the market will value COST stock with an FCF yield of between 1% and 1.5%. That is the same as multiplying $4.18 billion in FCF by 66.67 to 100 times. This is because 1 divided by 1.0% is 100x and 1 divided by 1.5% equals 66.67x.

So this puts the target market value for Costco between $268.67 billion and $418 billion. The midpoint is $348.3 billion, which is 29.3% over Costco’s market value today of $269.5 billion.

In other words, we can say that COST stock has a target value 29% higher at $786.21 (i.e., 1.293 x $608.05). That is a pretty good return for most investors. Moreover, if the company can raise its FCF margin, the effect on its valuation can be quite significant.

So far analysts are not that enamored with COST stock. The average of 17 analysts surveyed by TipRanks is $599.82, or 1.35% below today’s price. That is also what the Refinitiv survey indicates as well. Their survey of 31 analysts is $565.64 or 7% below today’s price.

However, I suspect that analysts may have to upgrade their price targets based on the company’s latest sales numbers, showing an average increase of 17.1% YoY. Once they see how much FCF the company will make this year, they are likely to come up with a price target close to $786.

On the date of publication, Mark 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.