Costco Stock Could Surge 30% Higher If Its Free Cash Flow Stays Strong

  • Costco (COST) is down over 13% year-to-date (YTD) but could rise significantly from here based on its huge sales growth.
  • Costco’s April sales were up 13.9% year-over-year (YoY), with U.S. sales up 13.8% YoY on a comparable basis.
  • Investors should consider buying Costco stock, as its powerful free cash flow could push it 25% higher.
Short-Term Profit Taking May Take a Bite out of the Costco Stock Price

Source: Helen89 /

On May 4, Costco (NASDAQ:COST) reported that its April monthly sales rose 13.9% YoY after rising 17.1% the prior month. Moreover, on a comp basis, its U.S. sales were up 13.8% YoY. This should mean good things for COST stock.

The company will likely report its results for the quarter ending in May during the first week in June. Right now, 24 analysts estimate revenue will hit $51.4 billion, compared to $50.94 billion last quarter.

Moreover, as it stands now, these analysts are forecasting earnings per share (EPS) for the year ending Aug. 31 to come in at $13.14, and up to $14.47 next year. So at today’s price below $500 ($490.47 as of yesterday’s close) COST stock trades for 36 times this year and 33.9 times next year’s EPS.

Those are not cheap multiples. However, it may be more worthwhile to look at the company’s valuation from a free cash flow (FCF) standpoint.

COST Costco $490.47

Costco Estimates Going Forward

Analysts forecast that Costco’s sales will reach $223 billion for its fiscal year ending mid-August 2022. That represents a potential 13.8% increase on a YoY basis from $195.93 billion last year.

However, with these latest figures, analysts could raise their estimates higher. That will especially be true if sales this summer keep rising at such high rates.

For one, high inflation may be starting to have a storage effect, where people load up on core items now since they expect prices to be even higher soon. That has the effect of pushing forward sales from the future. But in the short term, it jacks up YoY sales growth. Costco, a major warehouse and big-ticket-item sales store, is keenly able to benefit from people scared about rising prices.

After all, price levels are very high. The Department of Labor last reported on May 11 that the Consumer Price Index (CPI), which measures inflation, was up 8.3% in April over the last 12 months (LTM). The prior month’s LTM inflation was 8.5% and it was 7.9% in the prior month. In other words, price levels are elevated. This could be a major reason why Costco’s sales are rising 13% to 17% per month on a YoY basis.

Based on the company’s latest cash flow statement, its free cash flow (FCF) was $1.881 billion for the quarter 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 $223 billion in sales, FCF should hit $4.24 billion this year. We can use that to value COST stock.

Where This Leaves COST Stock

We can value COST stock using a FCF yield of around 1.5%. That is the same as multiplying $4.24 billion in FCF by 66.7, since 1 divided by 1.5% equals 66.67x.

This means Costco’s target market cap is $282.8 billion. This is 30.7% over Costco’s market value today of $216.37 billion.

Therefore COST stock has a target value of 30.7% over its price today of $490.47. That puts its value at $641.04. That is a pretty good return for most investors.

Analysts are not as sanguine on COST stock. The average of 19 analysts surveyed by TipRanks is $612.26, or 25% above today’s price. That is also what the Refinitiv survey indicates as well. Their survey of 29 analysts is $591.83 or 21% above today’s price.

Last month, analysts had lower price targets as you can see in my prior article. So they are also raising their views on COST stock, closer to my target of $640.28, 31% higher.

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 Publishing Guidelines.

Mark Hake writes about personal finance on, and

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