COST - Costco

[Ice77]

I see a lot of resistance among traditional value investors from paying higher revenue multiples. It would really help if some of them actually ran a DCF with say a 20% revenue CAGR for 5-8yrs, 15% FCF margin, 7% WACC, 1% terminal growth as simple assumptions to their model. There are many SaaS (and such models) that fit and well exceed this dynamic. It yields you a fair EV/revenue multiple in mid-high single digits (or higher as you adjust these assumptions up/down). Many of them are oligopolies or duopolies with strong and increasing moats (see their NPS, DBNRR, Customer churn, feature velocity etc). 

I believe those geiger counters that were designed in the 1930s need to be adjusted for the new economy asset light models (Less capital intensive, high LTV/CACs) with higher growth rates and impressive margins amid a lower cost of capital environment. Perennially looking for cigar-butts, asset plays and workouts and sneezing at every mention of high multiples of GARP models is not right. The world is changing, value investing fundamentals need not ... but the geiger counters still need adjusting to the altering reality. Or we become like dinosaurs. 

[dwy000]

45 minutes ago, Ice77 said:

I see a lot of resistance among traditional value investors from paying higher revenue multiples. It would really help if some of them actually ran a DCF with say a 20% revenue CAGR for 5-8yrs, 15% FCF margin, 7% WACC, 1% terminal growth as simple assumptions to their model. There are many SaaS (and such models) that fit and well exceed this dynamic. It yields you a fair EV/revenue multiple in mid-high single digits (or higher as you adjust these assumptions up/down). Many of them are oligopolies or duopolies with strong and increasing moats (see their NPS, DBNRR, Customer churn, feature velocity etc). 

I believe those geiger counters that were designed in the 1930s need to be adjusted for the new economy asset light models (Less capital intensive, high LTV/CACs) with higher growth rates and impressive margins amid a lower cost of capital environment. Perennially looking for cigar-butts, asset plays and workouts and sneezing at every mention of high multiples of GARP models is not right. The world is changing, value investing fundamentals need not ... but the geiger counters still need adjusting to the altering reality. Or we become like dinosaurs. 

can you give some examples of companies with those characteristics?  I struggle to rely on forecasts 3 years out let alone 8 years at a 20% cagr (with 15% fcf margins).  

[MattR]

1 hour ago, Broeb22 said:

To echo Gregmal's sentiment, I worked for a guy who consistently ran with 40% cash and had mediocre returns. He's the guy who bought MSFT at a single digit PE multiple around 2011-2013 then sold a couple years later when it went up 75% in a couple years. He got his 25% IRR and missed out on a huge run in the stock from $50 to $250.  and couldn't see that Nadella was a huge upgrade over Ballmer. Didn't wait around to find out how the new CEO would do things, and never revisited even after it ran up to maybe buy into what was now a really attractive GARP investment. 

He's also the guy that bought EBAY before it spun out PYPL and sold PYPL after one of his more boisterous clients showed him a short report discussing how much of PYPL's business that EBAY represented and at favorable take rates. Sold that at around $40, when PYPL is now a $265 stock (and maybe a bit overvalued).

I've made most of my (limited) money in GARP-y type stuff that I was able to buy at 20-25x forward earnings/cash flows and then watch it grow earnings at 15-20% per year. The only problem I found was there were companies I really liked that I just waited and waited and waited for them to get to that magical 20-25x earnings level that seemed to work, but they never got there. Some of these companies were always on the high side of 25x. Buying at 20-25x had worked out well for me on these companies that I thought could grow at 15-20% per year, so expanding what I'd pay would mean I might accept 12-15% returns, but it was better than sitting on cash like my boss taught me to do. 

P.S. my former boss' "best idea" is now Equity Commonwealth, a pile of cash run by a really smart real estate guy in Zell. Certainly not a bad pick, but the only idea you can find nowadays? C'mon man. 

Based on your reports of the former boss, it would be best to buy now and then wait several years after he sold to sell

[KCLarkin]

Ice77, using your assumptions, you need 20% growth for over 5 years just to get a 7% return. No wonder value investor dinosaurs don't like them!

This is very different than Costco (or GARP).

[Ice77]

17 minutes ago, KCLarkin said:

Ice77, using your assumptions, you need 20% growth for over 5 years just to get a 7% return. No wonder value investor dinosaurs don't like them!

This is very different than Costco (or GARP).

How do you get the 7% return? Help my dense brain understand the math behind that return 

[KCLarkin]

23 minutes ago, Ice77 said:

How do you get the 7% return? Help my dense brain understand the math behind that return 

This is best discussed on another thread.

[dwy000]

9 minutes ago, KCLarkin said:

This is best discussed on another thread.

You used a 7% WACC.  FCF is after debt service so thats effectively your equity return you are using as a discount rate. 

[Ice77]

1 hour ago, dwy000 said:

can you give some examples of companies with those characteristics?  I struggle to rely on forecasts 3 years out let alone 8 years at a 20% cagr (with 15% fcf margins).  

This blog by a prominent tech VC is a good starting point. But you'd have to dig deeper into the quality of their business models to see which ones have a strong and growing moat and which ones are merely benefiting from a rising tide as software eats the world. It's not enough to just look at the numbers and make an investment as you will need qualitative insights. One name that I really like is DOCU and if there is a material correction, will be happy to add. Anyway, this thread is for Costco so no more digressing posts here.  

https://cloudedjudgement.substack.com

[Broeb22]

37 minutes ago, dwy000 said:

can you give some examples of companies with those characteristics?  I struggle to rely on forecasts 3 years out let alone 8 years at a 20% cagr (with 15% fcf margins).  

Here are a couple that have worked for me. I want to point out that all of these companies had and continue to have positive cash flows, a net cash balance sheet (except AMOT), and had exciting historical financials. These are companies even a simpleton like me could get comfortable with (I understand what makes me comfortable may not make others), but I'm not buying some "disruptive tech" company with massive TAMs and all the usual garbage.

EPAM in late 2016/early 2017 at low 20's multiple of 2017 earnings and growing 20%+ per year every year since purchase.

DAVA in early 2019 at about 25x forward earnings and growing revenues 20%+ per year

AMOT in late 2016/early 2017 at 15x forward cash flows and has grown revenues 15%+ per year (with some large acquisitions in there) over the last few years and should resume strong growth after being down in 2020.

STNE in early 2019 at mid-20s multiple of 2019 earnings growing 40%+ per year since then and likely to grow 15%+ for the foreseeable future. 

CSWI in late 2016 at mid-teens multiple of 2017 earnings growing 10+% per year since then. 

JD in mid-2018 (I think) at a cheap value on a SOTP and stabilized retail margin basis and revenues growing mid-20% since purchase.

Some of the companies that I've admired for a long time that I have in the past not purchased because they were just too expensive for me (at the time) and I wanted them cheaper:

HEI, CPRT, FSV, PGR, GO, POOL, WSO, LESL, TDY, MLAB, AMSF, RLI, TFX, CGNX, CNSWF, ROP, NVR, CSL, TREX

Some of these I've caved on and bought them at higher multiples because I do think they are good businesses at decent-enough prices, but others I remain stubbornly waiting while their shares have moved higher over the years. 

[Gregmal]

Sounds like your old boss was one of those "MY 6% returns are better than your 20% returns" dudes....must have been fun. At least it was a learning experience. 

[fareastwarriors]

Costco Brings Its Low-Price Magic to Employer-Paid Drug Plans

 The company has backed startup Navitus to find health-care riches by simplifying pharmacy benefits.

 

https://www.bloomberg.com/news/articles/2021-04-22/costco-cost-health-care-approach-differs-from-amazon-amzn-walmart-wmt?srnd=premium

[mcliu]

On 4/9/2021 at 4:34 PM, Broeb22 said:

Here are a couple that have worked for me. I want to point out that all of these companies had and continue to have positive cash flows, a net cash balance sheet (except AMOT), and had exciting historical financials. These are companies even a simpleton like me could get comfortable with (I understand what makes me comfortable may not make others), but I'm not buying some "disruptive tech" company with massive TAMs and all the usual garbage.

Thanks for sharing these. Do you have any examples of current stocks that you're invested in that you think can achieve high returns for the next 10 years? 

[Broeb22]

2 hours ago, mcliu said:

Thanks for sharing these. Do you have any examples of current stocks that you're invested in that you think can achieve high returns for the next 10 years? 

With all the disclaimers about this not being investment advice out of the way, I like the following currently:

DFH

FERG

GDYN

Some of the names I mentioned previously are also still probably good long-term investments because their businesses will continue to grow, but returns may not be as high because multiple expansion probably won't repeat itself unless we go to -5% rates. 

[mcliu]

Broeb22, Thanks for the names!

It’s kind of nice that Costco hasn’t succumbed to opening up their website as a marketplace like Amazon or Walmart. The 3rd party sellers has made those websites a mess, so many low quality products and fake reviews.

 

[Spekulatius]

Costco Sales in April up 32.5%, 24.2% excluding gas prices. How is this possible? LOL

https://www.globenewswire.com/news-release/2021/05/05/2223887/0/en/Costco-Wholesale-Corporation-Reports-April-Sales-Results.html#:~:text=ISSAQUAH%2C Wash.%2C May 05,from %2411.39 billion last year.

The Spek family certainly did their part. We bought a washer dryer in March and I ordered an ipad pro (they had an $100 off coupon), in addition to all the ongoing stuff (groceries etc.)  We also upgraded to executive membership.

Edited May 6, 2021 by Spekulatius

[longlake95]

I think my wife, single handedly, keeps the Barrie, Ontario store afloat.... and I still don't own stock. I've long suffered from the financial trauma of thinking this was "always" expensive...and not paying up. what a mistake...

Edited May 6, 2021 by longlake95

[Gregmal]

Good things happen when you go to the front of the net. Is there anything to complain about here if you dont make valuation your primary focal point?

[longlake95]

you are right, they just do it right - valuation notwithstanding. The problem I still see, if you pay too high a price, even though the company does well you don't as a shareholders (especially if we see P/E compression going forward).

[Spekulatius]

I bought just a few shares in several accounts in early March when the price declined. For a brief moment, COST price seemed reasonable, considering the quality of the franchise.

Over time I can se COST becoming even more of a monster retailers, if they get online right. We have been buying groceries and all kind of incidentals at COST for a long time, but recently I had several items outstanding that I would have typically bought at Home Depot ( washer drier, kitchen faucet) that surprisingly enough I found at much cheaper prices at Costco at their website. I bought them online and while not superfast like Amazon, they were beating HD on delivery speed and the install of the washer dryer went OK as well.

That's now a whole new game where I my family at least starts to order large items online at Costco rather than just buying groceries. then I did a quick calculation and it occurred to me that paying paying $60 more for Executive and getting the Citi Costco credit card for larger rebates now is a no brainer financially and that's why i upgraded my membership and get the CC. if that's not a fly wheel, I don't know what is.

 

Now going back to COST as a business, I could see them becoming a force online in addition to their warehouses expanding over time. In fact, if they get online right (upgrade the website, the scope of offerings, the delivery times), I think they really can give Amazon a run for the money.

 

FWIW, I am prime customer as well, but for larger items, I really prefer a closed loop system like Costco. So if I have the choice to buy at Costco or Amazon for the same price, i would choose Costco without hesitation. if I just need some smaller item quick, I love the quick delivery that Amazon provides.