About Costco
There’s an old saying in Texas that you have probably both heard and maybe cringed at.
Everything’s bigger in Texas.
Although we certainly refuse to say anything bad about the aforementioned claims, in the context of large retailers, Costco really deserves to hold a similar title.
Everything’s bigger in Costco.
Yes, Walmarts are voluminous in their own right, however, walking into a Costco is just different.
You’re typically greeted by one of the company’s employees who asks to see your membership card and if you’re just cool enough, they’ll let you into one of the most exclusive clubs in the world, Costco.
While Walmart has its own membership store arm, Sam’s Club, another way in which Walmart and Costco directly differ involves its merchandise and more prevalently, store layout.
Specifically, both of these big-box retailers sell a lot of different merchandise and SKUs (stock keeping units), however, Costco is primarily in the business of selling in bulk. Anything from snacks to steaks or pet supplies and electronics, and so much more, this company is known for essentially running warehouses in and around the globe (primarily operating in the United States) and selling everyday goods out of their clubs.
We like to generally think of Costco as a Walmart-type retailer (in the sense of size, scale, operations and the goods both companies sell, which incidentally is a wide variety) that specializes in the art of club memberships and selling in bulk.
Before delving into the company’s financials we’d like to note that, as seen through previous Follow The Money segments, Costco has other locations across the world as well, however, as mentioned a few sentences above, the company’s primary stomping grounds are in the United States.
Also, one of the most important things to mention about the company is its famous hot dogs.
Club members have the privilege, nay, the honor of receiving a sizable hot dog and a fountain drink for a whopping $1.50.
Even throughout the worst of the recent inflationary pressures applied to businesses of all shapes and sizes, Costco has seemingly remained adamant when it comes to selling hot dogs and beverages at bottom of the barrel prices , which, as consumers, we commend.
Now that some of the basics regarding Costco are out of the way, let’s get right into some of the company’s core financials and try to devise a general opinion as to whether or not the company’s stock is worth considering investing in for years to come.
Costco’s stock financials
Currently sized up with a market capitalization of just north of $223 billion, Costco’s stock (NASDAQ: COST) is priced at around $500 per share with a price-to-earnings (P/E) ratio of 38.04 all while issuing an annual dividend of $3.60 to its shareholders.
Given these initial metrics, the company’s stock appears to be a bit overvalued according to its present price-to-earnings ratio, namely, as it stands well above 20, which is generally accepted to indicate that a stock is trading at exactly fair value and subsequently anything higher signals that a stock is overvalued.
This being the case, Costco’s stock seems well overvalued as its P/E is quite a ways away to the upside from the fair value benchmark of 20 at the moment.
Other than that, we like that the company shells out a healthy annual dividend to its shareholder base.
Moving over to the company’s balance sheet, Costco’s executive team is tasked with approximately $64.1 billion in total assets as well as around $43.5 billion in terms of total liabilities.
For retail, which is plagued with high fixed and variable costs, an ever changing and demanding consumer to constantly figure out, relatively thin margins and so much more, at least, when considering the Walmarts and Home Depots of the world, we were certainly pleased to find that Costco’s balance sheet isn’t just in good shape, but in fact, great shape, as its total assets out measure its total liabilities by a more than considerable margin, in such a thin-margin space.
This allows even a seasoned industry pioneer and leader such Costco to put money behind growth initiatives or even seriously consider making acquisitions, as the company’s strong financial base allows for these kinds of opportunities, among many others.
As it relates to the company’s income statement, Costco has seen a strong uptick in total revenue over the past five years. For instance, the company’s total revenue stood at nearly $142 billion in 2018 and has since risen each year to its latest reported figure (2022) of around $227 billion.
In this regard, Costco has proven itself and its business model to not only be able to survive but thrive during times of economic certainty and recession-related turmoil. This general growth in total annual revenue can likely be attributed to a combination of both rising in-store prices (due to inflation) and the company planting new stores across the country and globe on a consistent basis.
When it comes to the last of the company’s major financial statements, its cash flow statement, both Costco’s net income and total cash from operations during the same five-year time period were consistent and positive, which, given its total revenue growth isn’t all that surprising but more so validating to our thoughts in regard to the company thriving during recessionary periods.
Costco’s stock fundamentals
This is getting a little old, don’t you think?
We have stressed on and on and then some that trailing twelve month (TTM) net profit margins in the retail space are often unimpressive, boring and correspondingly not usually very high given the various costs imposed on retailers, such as shrink (theft), a plethora of fluctuating costs and what can feel like anything and everything that can chip away at its TTM net gross margin and consequently put its net profit margin in check.
This at least appears to be the case overall as it relates to Costco’s TTM net profit margin, however, it should be noted that its annual net profit margin does outpace the industry’s average by a good amount.
For example, according to TD Ameritrade’s platform, Costco’s TTM net profit margin is currently 2.57% in comparison to the industry’s average of 1.68%.
Yes, Costco doesn’t deviate much from the status quo in terms of maintaining a relatively low trailing twelve month net profit margin, however, beating the industry’s average by a somewhat large amount isn’t anything to discount.
Just as impressive, the company’s TTM returns on equity, assets and investment are all greater than that of the industry’s average as well. For instance, also according to TD Ameritrade’s platform, Costco’s TTM returns on investment stand at 18.77% in comparison to the industry’s average of 9.77%.
This is undoubtedly a material difference that mustn’t be taken for granted, especially in the ultra-competitive jungle that is retail.
Should you buy Costco stock?
As we have seen in one of our more recently published stock analysis articles, our only primary pain point with a quality company such as Costco is its valuation, something that its executive team unfortunately can’t directly address.
This makes sense given the stock’s impressive 161% run-up over the last five year’s span of time.
Other than the company’s current lofty valuation, Costco’s core financials speak to the company’s dominance within the retail sector and through a broader lens, its inherent, proven ability to withstand and outperform when other smaller competitors are on the brink of closing shop for good.
In keeping with our principals of objectivity and data-driven analysis, we just don’t see enough compelling catalysts that would spur material future growth, at least to justify paying a currently substantial premium for shares in the company’s stock.
Given all of this information, we give the company’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.