Reports of the death of the physical retail sector are greatly exaggerated. For proof of that, you need only visit your local Costco (COST), observes Shawn Allen, contributing editor to Internet Wealth Builder.
Costco needs little introduction. About 70% of its 865 member-only stores are located in the U.S., 13% in Canada, and 5% in Mexico. The remaining 12% of stores are in the U.K., Japan, South Korea, Australia, and Taiwan.
Its warehouse format and its focus on selling high volumes but on a limited selection of products is designed to achieve the lowest costs and lowest prices.
Performance: Costco’s shares have rewarded investors handsomely over the years. In 2019 the stock surged 44% to $292.92. In 2020 it’s up an additional 18%. The stock price also held up relatively well during the market meltdown earlier this year.
Recent earnings: Costco’s most recent report was for its 2020 third quarter, which ended on May 10. In the latest four quarters reported, Costco’s adjusted earnings per share growth has averaged about 9% year-over-year. Revenues per share increased by an average of 7%.
Same-store sales growth, adjusted for variations in fuel prices and currency exchange, has been strong at an average of 6% for the past four quarters.
Dividend: The stock currently pays a quarterly dividend of $0.70 ($2.80 per year) to yield 0.8%. This excludes occasional special dividends. The quarterly dividend has been increased annually for many years.
Valuation: Based on my analysis price of $345, Costco’s trailing p/e ratio is unattractively high, even for such a high-quality company, at 40. Its dividend yield is low, despite recent increases, at 0.8%.
This is partly due to its relatively low earnings payout ratio of 33% but mostly due to its high valuation in relation to earnings. The return on equity (ROE) is very strong at 24%. It is clearly a very high-quality company. But the stock looks quite expensive on a p/e basis.
Outlook: Costco’s 2020 fourth quarter ended on Aug. 30 and will be reported on Sept. 24. Same-store sales growth in its fourth quarter appears set to come in very high given that the growth in June was 14% and in July was 16%.
In its third quarter, the company reported significant incremental wage and sanitation costs related to COVID-19. Analysts will likely treat much of the incremental costs as unusual.
It therefore appears that Costco is set to report double-digit adjusted earnings per share growth for the fourth quarter. It also appears that Costco has gained market share due to the pandemic and this bodes well for its continued growth.
Risks: The main risk of investing in Costco is its high valuation in relation to earnings. Operationally it is low risk as it seems unlikely to lose market share or to cease growing.'
For now, we continue to rate the stock a "hold". Costco is expensive in relation to its earnings but is a high-quality company and it appears its growth is accelerating at this time.
