COST - Costco

[rb]

Up where I live I have 2 Costcos in 4 mile radius. Both have huge lines.

 

Gas is an insane deal at Costco. 18 cents per below market. That's about 70 cents a gallon for our American friends. We basically recover the cost of the membership out of gas savings alone in 2 weeks. The main complaint I hear from other Costco customers is that their Costco doesn't have a gas station.

 

Your conversion or units are wrong.  ;) US MA gas prices are aroundish $2.50-2.80 per gallon. Which is $2.50-2.80 / 3.78 ~= $.60-.80 per liter.

I just did a rough calculation... 4 liters to a gallon. But thanks for keeping me honest.

[Charlie]

What's in favor for Costco is that it is the biggest market of the world buying food etc.

and as long as their is their is enough customer incentive and they delight the customers

better than Wal Mart, Amazon, Aldi and Lidl they will win big....

Munger know better about customer incentives than everybody else, so they have the "best management consultant"

on board.

In the presentation I missed the psychological tendencies a little bit, that Munger talks so much about.

As long as Costco will delight the customers better than the others they will do very well....

 

 

 

 

 

[RadMan24]

Where else are you going to get a hot dog and a soda for $2?

[ScottHall]

So Costco is an amazing business... but what about the stock as an investment at current prices? Anyone a buyer at these levels?

[gfp]

Besides having inexpensive gasoline, they negotiated hard with Citi to provide 4% cash back on gas purchases with their Costco Visa card, which is a very attractive rate for cash rewards on gas purchases.  They also designed their pumps to be able to service cars with fuel filler openings on either side of the vehicle.  A lot of folks haven't realized this, but I wonder why other service stations haven't adopted this design.  Perhaps it is due only to the one-way nature of the costco stations, vs a traditional station where you can pull in from either direction.

[rukawa]

So Costco is an amazing business... but what about the stock as an investment at current prices? Anyone a buyer at these levels?

 

Seems expensive to me. I would need more apparent growth to justify price. Its eps growth is about 10% a year, which added to the dividend gives 11% a year assuming the pe ratio is unchanged which it has to be since it can't really go much higher. I think the business is very well run and I like shopping at costco but unless there is something bigger here I'm missing it isn't that compelling. I guess though if I were a billionaire it would be very compelling even at its current price.

[rb]

So Costco is an amazing business... but what about the stock as an investment at current prices? Anyone a buyer at these levels?

 

Seems expensive to me. I would need more apparent growth to justify price. Its eps growth is about 10% a year, which added to the dividend gives 11% a year assuming the pe ratio is unchanged which it has to be since it can't really go much higher. I think the business is very well run and I like shopping at costco but unless there is something bigger here I'm missing it isn't that compelling. I guess though if I were a billionaire it would be very compelling even at its current price.

I'm with you here. I would say that I never saw the stock as a screaming buy. Even when it sold off it wasn't what I'd call very cheap. Nevertheless, the stock kept on marching higher and higher.

 

It could very well be that I'm not good enough to recognize the opportunity that is obvious to investors better than me. In my book that is good as well. We all pick our targets and do what we can.

[Viking]

So Costco is an amazing business... but what about the stock as an investment at current prices? Anyone a buyer at these levels?

 

Seems expensive to me. I would need more apparent growth to justify price. Its eps growth is about 10% a year, which added to the dividend gives 11% a year assuming the pe ratio is unchanged which it has to be since it can't really go much higher. I think the business is very well run and I like shopping at costco but unless there is something bigger here I'm missing it isn't that compelling. I guess though if I were a billionaire it would be very compelling even at its current price.

I'm with you here. I would say that I never saw the stock as a screaming buy. Even when it sold off it wasn't what I'd call very cheap. Nevertheless, the stock kept on marching higher and higher.

 

It could very well be that I'm not good enough to recognize the opportunity that is obvious to investors better than me. In my book that is good as well. We all pick our targets and do what we can.

 

Agreed. Love the business and management; price has never gotten cheap enough for me. Over the years I have been able to find other companies that I admire as much but that are out of favour so I can purchase the stock at prices I am comfortable with. I like to buy stuff that people hate; Costco rarely goes there.

[bizaro86]

So Costco is an amazing business... but what about the stock as an investment at current prices? Anyone a buyer at these levels?

 

Seems expensive to me. I would need more apparent growth to justify price. Its eps growth is about 10% a year, which added to the dividend gives 11% a year assuming the pe ratio is unchanged which it has to be since it can't really go much higher. I think the business is very well run and I like shopping at costco but unless there is something bigger here I'm missing it isn't that compelling. I guess though if I were a billionaire it would be very compelling even at its current price.

I'm with you here. I would say that I never saw the stock as a screaming buy. Even when it sold off it wasn't what I'd call very cheap. Nevertheless, the stock kept on marching higher and higher.

 

It could very well be that I'm not good enough to recognize the opportunity that is obvious to investors better than me. In my book that is good as well. We all pick our targets and do what we can.

 

My experience with COST echoes some of my best investments. Where something was trading ALMOST at a price that I thought made sense, but was a really great business. After learning the hard way a few times that when I feel that way I should buy (GOOG at IPO a painful example), I've started to try and hold my nose and buy great businesses at prices that I think are almost fair. That's worked well so far, with COST, IBKR and ROST being success stories, and no failures yet.

 

It's tough, because it feels "greater fool" when doing it. I woudn't add to my COST position at the current price, but have mentally decided to never sell it unless it gets to a truly crazy/bubble type valuation.

[benchmark]

So Costco is an amazing business... but what about the stock as an investment at current prices? Anyone a buyer at these levels?

 

Seems expensive to me. I would need more apparent growth to justify price. Its eps growth is about 10% a year, which added to the dividend gives 11% a year assuming the pe ratio is unchanged which it has to be since it can't really go much higher. I think the business is very well run and I like shopping at costco but unless there is something bigger here I'm missing it isn't that compelling. I guess though if I were a billionaire it would be very compelling even at its current price.

I'm with you here. I would say that I never saw the stock as a screaming buy. Even when it sold off it wasn't what I'd call very cheap. Nevertheless, the stock kept on marching higher and higher.

 

It could very well be that I'm not good enough to recognize the opportunity that is obvious to investors better than me. In my book that is good as well. We all pick our targets and do what we can.

 

My experience with COST echoes some of my best investments. Where something was trading ALMOST at a price that I thought made sense, but was a really great business. After learning the hard way a few times that when I feel that way I should buy (GOOG at IPO a painful example), I've started to try and hold my nose and buy great businesses at prices that I think are almost fair. That's worked well so far, with COST, IBKR and ROST being success stories, and no failures yet.

 

It's tough, because it feels "greater fool" when doing it. I woudn't add to my COST position at the current price, but have mentally decided to never sell it unless it gets to a truly crazy/bubble type valuation.

 

At what price would you buy it?

[bizaro86]

My cost basis is $160. I think a 4% earnings yield (25x P/E) it would be a buy.

 

If it ever gets to a high teens P/E I would likely make it a concentrated position.  (Outside of a value 2008 type meltdown where everything is on sale)

[Viking]

 

My experience with COST echoes some of my best investments. Where something was trading ALMOST at a price that I thought made sense, but was a really great business. After learning the hard way a few times that when I feel that way I should buy (GOOG at IPO a painful example), I've started to try and hold my nose and buy great businesses at prices that I think are almost fair. That's worked well so far, with COST, IBKR and ROST being success stories, and no failures yet.

 

It's tough, because it feels "greater fool" when doing it. I woudn't add to my COST position at the current price, but have mentally decided to never sell it unless it gets to a truly crazy/bubble type valuation.

 

I am moving in this direction over time... only buy best in class companies...

[SlowAppreciation]

So Costco is an amazing business... but what about the stock as an investment at current prices? Anyone a buyer at these levels?

 

Yeah it doesn't look cheap. And even when it dropped to the $150s, I felt the valuation was a bit of a stretch so I only made it a ~3% position. But I'd add the below to the bull case, even at these levels (doesn't mean I'm personally buying right now though):

 

• sales, earnings, store metrics, etc growing at a very healthy clip (and accelerating), without growth in capital. That's a very very powerful combo
  
• And the bigger Costco gets, the better the business gets and the faster they can grow (i.e. self-reinforcing biz model/flywheel effect)
  
• there's lots of low hanging fruit left (E-Commerce, int'l expansion, Kirkland)
  

[SlowAppreciation]

Keeps on plugging away:

 

[SlowAppreciation]

https://www.wsj.com/articles/charlie-munger-unplugged-11556935195

 

Q: If there were one company other than Berkshire that you would recommend for the next decade or two, what would it be?

Munger: In American it would be Costco. Other than in America, buy the strongest companies in China.

 

Q: Do any companies have a sustainable moat against competition from the likes of Amazon? Who is Amazon-proof?

Munger: I think that Amazon has more to fear from Costco than Costco has to fear from Amazon. Because [Costco has] a better warehouse situation, much cheaper, plus a public that totally believes that anything they sell will be high quality and low price, and so, and they’re just the sleeping giant that nobody —they’re coming late to any sort of delivery system. But in the end they’ll be more efficient and they’re already more trusted. So I would say all the figures show that Costco has nothing to fear from Amazon.

 

Q: What about Berkshire?

Munger: Everybody else has a lot to fear from Amazon. I didn’t name Berkshire! I named Costco.

 

I get the sense that he likes Costco...

[bookie71]

I get the sense that he likes Costco...

He's was (is) on the board.

[SlowAppreciation]

I get the sense that he likes Costco...

He's was (is) on the board.

 

Yes, I was being facetious

[bizaro86]

 

My experience with COST echoes some of my best investments. Where something was trading ALMOST at a price that I thought made sense, but was a really great business. After learning the hard way a few times that when I feel that way I should buy (GOOG at IPO a painful example), I've started to try and hold my nose and buy great businesses at prices that I think are almost fair. That's worked well so far, with COST, IBKR and ROST being success stories, and no failures yet.

 

It's tough, because it feels "greater fool" when doing it. I woudn't add to my COST position at the current price, but have mentally decided to never sell it unless it gets to a truly crazy/bubble type valuation.

 

My cost basis is $160. I think a 4% earnings yield (25x P/E) it would be a buy.

 

If it ever gets to a high teens P/E I would likely make it a concentrated position.  (Outside of a value 2008 type meltdown where everything is on sale)

 

So apparently my intuition on this is terrible, as it's up about 35% in the year or so since these posts. Now it's at the point valuation wise I'm considering selling. I have a 100% record of regretting selling good businesses when I do so for valuation reasons, so I'm holding for now, but I'm getting more and more uncomfortable.

 

On the anecdotally a good business side of things, my Costco spend is up about $2k/year. They went from 6 pumps to 9 at the gas bar near me, which took the average wait down from 20-30 minutes to 3-5 minutes, which I find acceptable given the significant savings. Given all the pumps are full all the time now and before, I assume their sales increased about 50% for gas. While I know gas is low margin, I don't think it's zero margin, and the volume has to be huge.

[peterHK]

It's expensive today because anything good with stable revenues/growth has been bid up as interest rates have fallen. I'd be trimming if I owned some, but I would never sell the whole position.

 

This is high on the "will buy one day" list. At an 8.5% WACC with ~14% FCF/share cagr (lots of BB's), I'm getting $214/share in intrinsic value, so it's trading closer to a 7.5% WACC which is too low, and will likely reverse when rates rise.

[SlowAppreciation]

Valuation isn't great, but a few things I've been thinking about:

• ROE has been increasing pretty steadily, which justifies higher multiple. What would cause this trend to reverse?
  
• Kirkland brand is probably underestimated.
  
• Anecdotal, but I know a bunch of millenials who have "discovered the (Costco) religion". The bear case a few years ago was that Costco only appealed to aging baby boomers and was missing out on tech-centric millennials.
  

[DTEJD1997]

Hey all:

 

COST is certainly a well run company.  Good for workers, good for investors, good for shoppers.  I have been a member there in the past, and liked shopping there.

 

HOWEVER, at a 35 P/E and 20x EV/EBIDTA where is the future appreciation going to come from?

 

Are the multiples going to expand?  Go to a 40 P/E maybe?

 

They are doing about 150BB a year in sales now.  In 10 years will they be doing $300BB a year in sales?

 

In my area, COST stores are just "silly" in terms of crowds and sales.  It is frequently difficult to find a spot in the parking lot.

 

My area almost certainly could use another store maybe...but we have a new competitor coming into the market, BJ's wholesale.  They are rebuilding an abandoned K-Mart location and will be about 1 mile from a COST location.  COST probably has little to fear from BJ's, but BJ's will take some sales I imagine...5%, 10%, 20% even?

 

I have an arrangement where I get Sam's Club membership for free.  A few years ago, Sam's club was a DISTANT 2nd to COST.  COST is still better than Sam's Club....but the difference is much smaller than what it was.  WMT has remodeled most of the local Sam's Club's...they paid particular attention to fresh/refrigerated in store food sections.  For me, it is a close call...might be just marginally better to shop at Sam's for free than paying membership at COST?

 

COST is a great company, but at these valuation levels, I think a lot has to go right to make money and there is more risk in this thing than most people believe.

 

 

[bizaro86]

I don't disagree with you - great company, lousy valuation. But I do think them doubling sales is relatively possible. I've been to 3 Costco's in my home metro area, 2 on different Hawaiian Islands, 1 in Mexico and 3 in California in the last 2 years. They were all completely packed to the point where additional capacity in the form of new warehouses would almost certainly be warranted. While that is obviously not an unbiased random sample, it does give me confidence that there is room for them to expand even in their current geographies. There have to be some people who don't want to drive and then wait in a huge line every time who would go if there was one closer and/or lines were shorter.

 

I also think there is lots of white space internationally. They have 100 warehouses in Canada (and could easily add more where I live that would be busy). But they only have 10 in Australia. While the population of Canada is ~55% larger than Australia, Australia's is even more concentrated in the big cities, which is good for Costco. At the same store density by population as Canada they could open another 55 in Australia.

[peterHK]

They grow same store sales at 4-8% a year. Tack on 24-25 store openings around the world and in the US (they just opened on in Shanghai for instance), and you can get 8%+ CAGR in sales with new members growing at 3% a year and pricing at 2% CAGR on memberships.

 

You add share buybacks and one can get to 10% EPS growth fairly easily.

 

The big question is how much do you pay for that?

[DTEJD1997]

They grow same store sales at 4-8% a year. Tack on 24-25 store openings around the world and in the US (they just opened on in Shanghai for instance), and you can get 8%+ CAGR in sales with new members growing at 3% a year and pricing at 2% CAGR on memberships.

 

You add share buybacks and one can get to 10% EPS growth fairly easily.

 

The big question is how much do you pay for that?

 

I simply do not see how they are going to grow SSS at 4-8% a year in my area.  The stores are simply jammed right now. 

 

Could they open a new location?  Absolutely.  If they exercised good discretion in where they opened it, I bet it would do well.  HOWEVER, opening a new store in my general area would no doubt draw sales from their already existing stores.  Then you've got BJ's opening brand new locations...you've also got the remodeled Sam's Club stores.  Is it possible that Costco's Detroit area stores could even suffer negative SSS?  Probably not, but certainly not impossible.

 

I am unsure what the rest of the USA looks like for Costco.  I imagine that they absolutely have SOME room for growth...but it is not like it was 20 or even 10 years ago.

 

Internationally could indeed be a totally different situation for them, and they might have many years of relatively easy oversees expansion.  However, overseas expansion has many more factors of risk than operating in the USA.  I would also think that totally new, and relatively new international locations will have losses for at least a few years as they have to build infrastructure totally from scratch.

 

In the end, I think you are right that COST will grow, but I just think it will be riskier & not as easy as it has been in USA.  This is as the valuation metrics are pretty high!

 

 

[SHDL]

They grow same store sales at 4-8% a year. Tack on 24-25 store openings around the world and in the US (they just opened on in Shanghai for instance), and you can get 8%+ CAGR in sales with new members growing at 3% a year and pricing at 2% CAGR on memberships.

 

You add share buybacks and one can get to 10% EPS growth fairly easily.

 

The big question is how much do you pay for that?

 

I simply do not see how they are going to grow SSS at 4-8% a year in my area.  The stores are simply jammed right now. 

 

Could they open a new location?  Absolutely.  If they exercised good discretion in where they opened it, I bet it would do well.  HOWEVER, opening a new store in my general area would no doubt draw sales from their already existing stores.  Then you've got BJ's opening brand new locations...you've also got the remodeled Sam's Club stores.  Is it possible that Costco's Detroit area stores could even suffer negative SSS?  Probably not, but certainly not impossible.

 

I am unsure what the rest of the USA looks like for Costco.  I imagine that they absolutely have SOME room for growth...but it is not like it was 20 or even 10 years ago.

 

Internationally could indeed be a totally different situation for them, and they might have many years of relatively easy oversees expansion.  However, overseas expansion has many more factors of risk than operating in the USA.  I would also think that totally new, and relatively new international locations will have losses for at least a few years as they have to build infrastructure totally from scratch.

 

In the end, I think you are right that COST will grow, but I just think it will be riskier & not as easy as it has been in USA.  This is as the valuation metrics are pretty high!

 

Personally my spending at Costco has gone up with my disposable income and family size, not because I visit their stores more often but because I just buy more stuff when I go.  If everyone does that I think SSS can grow at a rate close to GDP —- or maybe a bit better if the Costco shoppers continue to economically outperform rest of the population — even if their stores are already quite busy.

 

The more interesting growth opportunity though is e-commerce.  We shall see how that goes but so far it sounds like they are off to a good start.

 

I agree that the valuation has gotten quite high.  It’s not impossible to justify given the circumstances, but I think there will be a better entry point somewhere down the road.