Is Costco Too Expensive Here?

With shares of Costco Wholesale Corporation (NASDAQ:COST) trading at around $105.16, is COST an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Costco has been a big winner for many years now, but so was Mike Tyson. Past success increases the odds of future success, but it doesn’t guarantee future success. If Costco were to lose its edge and not stay alert to all competitor moves and macroeconomic trends, it would fail. Let’s take a look at some positives and negatives for Costco. This will give us a good idea of whether or not Costco is staying sharp.

Positives:

  • Top-tier management
  • Consistent improvements in revenue on an annual basis
  • Consistent improvements in earnings on an annual basis
  • Strong cash flow
  • Good debt management
  • 1.10 percent yield (not overly impressive, but still a positive)
  • Best value possible offered to customers
  • Member renewal rates have remained steady in recessions
  • Costumers have good credit (they won’t slow down as much during recessions)
  • Domestic and international growth

Negatives:

  • Comps sales growth of 4 percent in March (not the company’s best performance)
  • Unimpressive margins
  • Consumers dealing with high gas prices and higher taxes
  • Foreign currency fluctuations
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Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Costco, Wal-Mart Stores Inc. (NYSE:WMT), and Target Corp. (NYSE:TGT). Costco has a market cap of $45.96 billion, Wal-Mart has a market cap of $265.51 billion, and Target has a market cap of $44.17 billion.

COST

WMT

TGT

Trailing   P/E

23.56

15.53

15.29

Forward   P/E

20.87

13.26

12.45

Profit   Margin

1.90%

3.62%

4.09%

ROE

17.33%

22.42%

18.52%

Operating   Cash Flow

$3.34 Billion

 $25.59 Billion

 $5.32 Billion

Dividend   Yield

1.10%

2.40%

2.10%

Short   Position

1.30%

1.60%

3.20%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Costco is stronger than the industry average of 0.70. Costco is also the only company listed here with a positive balance sheet. Costco’s debt management has been good.

Debt-To-Equity

Cash

Long-Term Debt

COST

0.47

$5.65 Billion

$4.87 Billion

WMT

0.66

$7.81 Billion

$54.23 Billion

TGT

1.07

$788.00 Million

$17.65 Billion

 

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T = Technicals Are Strong  

Costco has outperformed Wal-Mart and Target for one-year and three-year time frames. Wal-Mart has been the best performer over the past month. Wal-Mart also offers the highest yield at 2.40 percent.

1 Month

Year-To-Date

1 Year

3 Year

COST

1.57%

6.79%

30.07%

96.23%

WMT

6.60%

15.00%

27.88%

54.25%

TGT

1.53%

17.44%

23.38%

29.17%

 

At $105.16, Costco is trading above all its averages.

50-Day   SMA

103.51

100-Day   SMA

102.14

200-Day   SMA

99.71

 

E = Earnings Have Been Strong                 

Earnings and revenue have consistently improved since 2010.  Many companies throughout the broader market saw revenue declines in 2012, but that isn’t the case for Costco. That’s also not the case for Wal-Mart or Target.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

72.48

71.42

77.95

88.92

99.14

Diluted   EPS ($)

2.89

2.47

2.92

3.30

3.89

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. Revenue and earnings also improved on a sequential basis.

2/2012

5/2012

8/2012

11/2012

2/2013

Revenue   ($)in   billions

22.97

22.32

32.22

23.72

24.87

Diluted   EPS ($)

0.90

0.88

1.38

0.95

1.24

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

If the consumer is strong, then discount stores will perform well. If the consumer weakens, then discount stores will hold their own. The latter isn’t terrible for investors because even if the stock doesn’t perform as well as anticipated, there will still be dividend payments.

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Conclusion

Costco might be known as a solid defensive play, but the stock lost more than 40 percent during the financial crisis of 2008/2009. Wal-Mart and Family Dollar Stores Inc. (NYSE:FDO) showed gains in 2008. Therefore, they’re likely to be safer options if we find ourselves in a similar environment in the future. However, the tricky part is that if the market holds, or even ascends, then Costco has the most growth potential.

Costco is an OUTPERFORM, but it would be wise to gradually add to a position (opposed to buying all at once). This way, if the stock performs well, it’s a small win. If the stock performs poorly, then more stock can be purchased on an incremental basis on the way down. Due to uncertain market conditions, a conservative approach should be considered.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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