Costco Wholesale Corporation (COST)

Equity
US
Consumer Defensive

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Good trading liquidity

Key return factors

Strong margins and returns

Greatly overvalued vs peers

Good growth

Company profileCostco Wholesale Corporation, together with its subsidiaries, engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. It offers branded and private-label products in a range of merchandise categories. The company offers sundries, dry groceries, candies, coolers, freezers, liquor, and tobacco and deli products; appliances, electronics, health and beauty aids, hardware, garden and patio products, sporting goods, tires, toys and seasonal products, office supplies, automotive care products, postages, tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosks, and jewelry; and meat, produce, service deli, and bakery products. It also operates pharmacies, opticals, food courts, hearing-aid centers, and tire installation centers, as well as 636 gas stations; and offers business delivery, travel, same-day grocery, and various other services online in various countries. As of August 29, 2021, the company operated 815 membership warehouses, including 564 in the United States and Puerto Rico, 105 in Canada, 39 in Mexico, 30 in Japan, 29 in the United Kingdom, 16 in South Korea, 14 in Taiwan, 12 in Australia, 3 in Spain, 1 in Iceland, 1 in France, and 1 in China. It also operates e-commerce websites in the United States, Canada, the United Kingdom, Mexico, South Korea, Taiwan, Japan, and Australia. The company was formerly known as Costco Companies, Inc. and changed its name to Costco Wholesale Corporation in August 1999. Costco Wholesale Corporation was founded in 1976 and is based in Issaquah, Washington.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

52.90

50.20

PEG

4.30

P/B

17.30

12.90

P/S

1.40

P/FCF

57.90

45.10

EV/EBITDA

36.30

33.10

From both historical and forecast perspectives, the stock is considerably overpriced compared to similar stocks. Specifically, the stock is expensive' on P/E, overvalued on EV/EBITDA, and overpriced on P/FCF.

Performance: Decent

The stock has been growing steadily in the past six months, adding 40% in total. The stock has outperformed its global peers from the same sector and industry (as shown above), surpassing them by 38ppts in total. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is 'fair'.

Analyst view: Somewhat favourable

The average target price is 743 and suggests 8% downside potential. Usually, this means a SELL recommendation among investment firms, or a recommendation to decrease one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 870.0. This translates into 7% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 650.0. This is equivalent to 20% downside potential in the worst case.

Profitability: Strong

RoE

Costco Wholesale Corporation reported a return on equity (RoE) of 32.6% in the last 12 months, up from 29.5% in FY23. The market consensus projects an RoE of 28.9% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 10.9% in the last 12 months, an increase from 10.3% in FY23. The market analysts predict that RoA will be 10.7% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) grew to 22.3%, above the peers. The consensus estimate for FY24 for RoCE is 27.2%, again ahead of the peers.

Net margin

EBITDA margin

Historically, COST has reported weak net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 2.8%, a growth from 2.7% in FY23. The company has reported weak EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 4.2% in the last 12 months, a decline from 4.3% in FY23.

RoIC / WACC = 3.7(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 3.7 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Good

Revenue

EBITDA

EPS

Free cash flow

COST reported revenue of USD 248 828mn in the last 12 months, up 1% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 4% from FY23 to USD 15.31. Market expects EPS to reach USD 16.12493 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA growth has been weak. This all contributed to continued EPS growth (positive-to-neutral). FCF has grown rapidly, much better than EBITDA. We emphasize the highly volatile dynamics of FCF. On the positive side, revenue, EBITDA and EPS dynamics is very stable.

Dividends: Decent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are unclear. In the past 12 months, the dividend yield has been good and slightly above its peers. At the same time, the average five-year yield has been significantly lower, at very close to zero. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Limited

The risk of default is minimal. We note solid return on capital, low margin volatility, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to bleak profitability.

Volatility: Negligible

In normal market circumstances, COST is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, COST is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Low

COST boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains mildly favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.