COST - Costco

[bizaro86]

Nothing to add other than to say I have diamond hands for COST. The valuation only seemed close to reasonable when I bought (vs cheap) and I've wanted to sell on over-valuation multiple times since then, and that would have been a mistake.

[AzCactus]

I think there's a loyalty and brand reputation that exists with Costco and is actually quite strong relative to Coke.  Most people I know who shop at Costco consider it a superior experience to Sams or other competitors in their space.  Coke has many brands and some of the biggest are unhealthy.  That obviously impacts perception---people want a healthy alternative and Coke is no longer as dominant.  At any rate I've made this ~6% position and will add if it falls further. 

[RadMan24]

I think there's a loyalty and brand reputation that exists with Costco and is actually quite strong relative to Coke.  Most people I know who shop at Costco consider it a superior experience to Sams or other competitors in their space.  Coke has many brands and some of the biggest are unhealthy.  That obviously impacts perception---people want a healthy alternative and Coke is no longer as dominant.  At any rate I've made this ~6% position and will add if it falls further.

 

It's just the old Phil Fisher argument. If Costco earns $10 EPS today, and it earns $20 EPS in 10 years, using the same 34x multiple, you have a $680 stock, a double. But if that multiple drops to its "pre-covid average" of around 27, you have a $540 stock. A 60% return over 10 years. In general, that's probably what I would expect given how low interest rates are today. In 10 years time, there is a high chance of higher interest rates, stronger economy, etc. but how that impacts the multiple is anyone's guess. It would just seem that there's a lot of potential for a lower multiple in the future, as opposed to the same or higher one. This will inherently offset the moat and earnings growth which will have some tailwinds. 

 

In 20 or 30 years time, there's the possibility something else that comes along that overtakes Costco, or the culture inside Costco starts to deteriorate.

 

As long as you have modest return expectations, you probably won't be disappointed with this investment idea.

 

Edit: cleaned up some text

[AzCactus]

Clearly the input you are using is that eps double over the next 10 years so compounds at like 7%.  This number could be a little low in my judgment.  Between 2010/2020 earnings like 2.5X if I did my quick math right.  Furthermore, I think this is a company that has some pricing power.  Either way, we'll catch up in 2030 and see if the stock is at $340, $560 or some other number. 

[ValueMaven]

Down about -20% from its highs and from its last special dividend.  after watching on the sides for too long I've started to buy.  Just the pull back I was looking for to start an initial fresh position. 

[Spekulatius]

Down about -20% from its highs and from its last special dividend.  after watching on the sides for too long I've started to buy.  Just the pull back I was looking for to start an initial fresh position.

 

Same here. Got a few shares in one account. I buy a few more, if it falls below $320. I guess valuations do matter after all as COST has drastically underperformed the market since summer.

[ValueMaven]

bought some more below $310 ... think this is an overreaction!

[dwy000]

Bought in for the first time after watching it forever. 

 

As a true value investor I think this the first time I have bought a stock with a PE ratio over 30.  Have held a bunch when the "E" tanked for a while, but the first time legitimately buying a high PE stock.

 

Now for the hard part - sit back and wait years.

[Liberty]

It's almost like the pandemic never happened for them. Almost back to levels before. ¯\_(ツ)_/¯

[gokou3]

I am a Costco member and love it, but I have a variant view on the valuation.  My 5-minute research (i.e. ready to be rebutted) shows that the various valuation metrics are still near all time high over the long term.  They have only receded from their recent highs.  Are there recent developments in the market (interest rate?) or their business (accelerating international expansion?) that justify the high valuation?

 

 

[peridotcapital]

I am a Costco member and love it, but I have a variant view on the valuation.  My 5-minute research (i.e. ready to be rebutted) shows that the various valuation metrics are still near all time high over the long term.  They have only receded from their recent highs.  Are there recent developments in the market (interest rate?) or their business (accelerating international expansion?) that justify the high valuation?

 

It is definitely not cheap based on recent history. Since the great recession, as rates have come down and stayed relatively low, this has traded around 30x EPS, as it does today. I think it interests value oriented folks even at that level given the strength of the business, the international growth potential, and the fact that the S&P 500 trades for 22x now versus mid to high teens pre-pandemic.

 

Relative to the market, 30x seems very fair for a business of this quality if you think they can grow earnings well into the double digits annually for the next decade. If the market is going to trade for 20x, companies like this (Starbucks being another) are likely going to continue to fetch a premium, as they should given the strong moat and low risk profile.

 

Put another way, if the S&P grows earnings 6% annually over the long term and is going to trade for a PEG of 3.0-3.5x in a low rate environment, maybe COST is a great, low risk GARP investment at 30x (PEG of 2.0-2.5x). Relative to its growth, it trades at a discount even with a 30 P/E.

[dwy000]

I am a Costco member and love it, but I have a variant view on the valuation.  My 5-minute research (i.e. ready to be rebutted) shows that the various valuation metrics are still near all time high over the long term.  They have only receded from their recent highs.  Are there recent developments in the market (interest rate?) or their business (accelerating international expansion?) that justify the high valuation?

 

It is definitely not cheap based on recent history. Since the great recession, as rates have come down and stayed relatively low, this has traded around 30x EPS, as it does today. I think it interests value oriented folks even at that level given the strength of the business, the international growth potential, and the fact that the S&P 500 trades for 22x now versus mid to high teens pre-pandemic.

 

Relative to the market, 30x seems very fair for a business of this quality if you think they can grow earnings well into the double digits annually for the next decade. If the market is going to trade for 20x, companies like this (Starbucks being another) are likely going to continue to fetch a premium, as they should given the strong moat and low risk profile.

 

Put another way, if the S&P grows earnings 6% annually over the long term and is going to trade for a PEG of 3.0-3.5x in a low rate environment, maybe COST is a great, low risk GARP investment at 30x (PEG of 2.0-2.5x). Relative to its growth, it trades at a discount even with a 30 P/E.

 

That was exactly my thinking.  They have the runway for double digit growth for at least 10 years, especially internationally.  And I'm sick of waiting for the valuation to come down to sub 20x while missing out on the growth.  My worst case scenario over the next 5-10 years is a single digit annual return.  Base case is much, much higher.

[Jurgis]

They have the runway for double digit growth for at least 10 years, especially internationally.

 

Morningstar expects mid single digit sales growth and I don't see any reason why it would/should be higher than that based on the history. OK, I'll go with 7% growth. Still not cheap and nothing to get excited about IMO.

[AzCactus]

Morningstar expects mid single digit sales growth and I don't see any reason why it would/should be higher than that based on the history. OK, I'll go with 7% growth. Still not cheap and nothing to get excited about IMO.

 

I don't think anyone here is saying that Costco is "cheap." I think what folks are saying is that they are a good value given the brand reputation, prospects for growth especially internationally and their online sales booming.  I guess where we disagree is whether or not it's something to get excited about.  For me this is a small-medium position and if it falls I'll keep adding.  If this is a falling knife, let it slash me open lol Cheers

[hasilp89]

know it doesn't belong here and won't go on after this (had hoped for more responses on the post i had - if anyone has any comments can post there) . But any thoughts on the relative value of BJ's vs. Costco? The size/growth/reputation of Costco speaks for itself and clear to me that BJ's sits in third place behind it and Sam's on various metrics but it trades at 15x NTM P/E vs. COST at 30x. It's not poorly run and in terms of US growth they have a longer runway and are finally starting to open new stores. I'd assume there are more than 217 cities in the US that can handle 2-3 club retailers?

[KCLarkin]

Morningstar expects mid single digit sales growth and I don't see any reason why it would/should be higher than that based on the history. OK, I'll go with 7% growth. Still not cheap and nothing to get excited about IMO.

 

One could view Costco as an "equity bond". The earnings yield is 3% but growing >7% per year. Boring yes. But also very attractive as a bond proxy.

 

 

[peridotcapital]

They have the runway for double digit growth for at least 10 years, especially internationally.

 

Morningstar expects mid single digit sales growth and I don't see any reason why it would/should be higher than that based on the history. OK, I'll go with 7% growth. Still not cheap and nothing to get excited about IMO.

 

You can create a lot of shareholder value with single digit sales growth. Costco has averaged sales growth of 8% annually over the last 10 years. More importantly, earnings per share have nearly tripled from $3.30 to $9.02 during that time. For such a dominant and resilient business, that's pretty impressive.

[RetroRanger]

Also costco will be a winner in an Inflation based scenario if that will happen in the next few years . Consumer Stocks where always a good choice in those Times!

[shamelesscloner]

Has anyone attempted to calculate the Return on incremental invested capital for Costco?

https://sabercapitalmgt.com/calculating-the-return-on-incremental-capital-investments/

 

I'm coming up with 11% as the rate of value compounding.

[coc]

For a growing retailer that’s going to tend to understate the real ROIC because the newest part of the store base hasn’t matured yet.

[ANP301191]

Has anyone attempted to calculate the Return on incremental invested capital for Costco?

https://sabercapitalmgt.com/calculating-the-return-on-incremental-capital-investments/

 

I'm coming up with 11% as the rate of value compounding.

 

Hi, new to this forum, but been a COST shareholder for a while. The big question I have is why management felt necessary to return extra capital (4.4bn if I am not mistaken) with the special dividend if they can compound money at 11%. Not disputing the math, just whether management truly thinks they can grow at anything close to that.

 

I dont know the exact locations of the stores or anything, but I doubt there is much expansion possibilities in the US anymore. I know they opened up a few stores in China and anecdotally they seem to be doing well. I have a few friends who were previously Costco members in the US who have shopped in Costco's Chinese branches - pricing/product choices/service seems to be the same high quality as it is in the US. But I feel like management isn't going full throttle in China in anyway, I think 3 stores in total. I know that they have focused on online sales during the pandemic, and I do think they may keep some if not the majority of their new customer gains, I dont see them growing new members by 7% this year as well.

 

All that being said, I love the business, management/culture is a huge plus. And who knows they could keep buying back stock so, shareholders may get the 11% compounding returns, but I dont see the business getting that kind of growth. If however, management does believe that and are reading this forum, I still have the 10$/share they sent me, and am more than happy to return it to them tomorrow.

 

[bizaro86]

Has anyone attempted to calculate the Return on incremental invested capital for Costco?

https://sabercapitalmgt.com/calculating-the-return-on-incremental-capital-investments/

 

I'm coming up with 11% as the rate of value compounding.

 

Hi, new to this forum, but been a COST shareholder for a while. The big question I have is why management felt necessary to return extra capital (4.4bn if I am not mistaken) with the special dividend if they can compound money at 11%. Not disputing the math, just whether management truly thinks they can grow at anything close to that.

 

I dont know the exact locations of the stores or anything, but I doubt there is much expansion possibilities in the US anymore. I know they opened up a few stores in China and anecdotally they seem to be doing well. I have a few friends who were previously Costco members in the US who have shopped in Costco's Chinese branches - pricing/product choices/service seems to be the same high quality as it is in the US. But I feel like management isn't going full throttle in China in anyway, I think 3 stores in total. I know that they have focused on online sales during the pandemic, and I do think they may keep some if not the majority of their new customer gains, I dont see them growing new members by 7% this year as well.

 

All that being said, I love the business, management/culture is a huge plus. And who knows they could keep buying back stock so, shareholders may get the 11% compounding returns, but I dont see the business getting that kind of growth. If however, management does believe that and are reading this forum, I still have the 10$/share they sent me, and am more than happy to return it to them tomorrow.

 

I think they probably could grow the store base faster than they are. But management cares more about maintaining the culture than maximizing growth I think. That is probably a good thing.

 

I think there is probably more growth than people think left. Canada has more than twice as many costco locations per population than the USA (partly due to no Sams/BJs). The city I live in has a metro population of 1.4 MM, and we just got our 7th costco. There are at least two areas of the city where plenty of people don't have a membership because of how far the nearest store is. We could probably support 9-10 warehouses here. There is more competition in the US, but I think they will be able to keep growing domestically for quite some time.

 

If they end up with hundreds of stores in China the current price will appear to be a bargain in hindsight. Maybe that won't be a big success, but there is definitely option value on that growth. If Calgary can have 7 or more profitable locations, it seems to me that number is probably at least 3 or 4 in literally dozens of cities in China. I'm fine with them taking their time on that though.

[ValueMaven]

Over the past 20 yrs - investors in COST havent had many chances to buy the stock down 20% from its high - with the business booming.  COVID related costs will subside over the coming quarters, and membership will increase!!  Once travel opens-up, food court etc (didnt they sell something like 200M hotdog and sodas last year?) - many investors are overdiscounting this...they need a lot of help on the website - but I think management will slowly role this out and offer members same-day pick-up curbside pickup.  AMAZON CANNOT COME CLOSE TO OFFERING THIS. 

 

[Jurgis]

food court etc (didnt they sell something like 200M hotdog and sodas last year?)

 

AFAIK, COST is losing money on hotdogs. May not be losing money on sodas. Do you know how much food court is a profit center vs being a loss center?

[cubsfan]

^ Why would anyone care if they lose money on hot dogs or roasted chickens?

 

They make the bulk of their money on membership fees and store growth.

 

Costco will continue to offer some incredible & permanent deals just to keep members totally loyal.