Breaking News
LAST CHANCE for Cyber Monday SALE: Up to 54% off InvestingPro! Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Costco: Deserved Rich Valuation, Little Room for Upside

Stock MarketsSep 28, 2021 09:30PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. Costco: Deserved Rich Valuation, Little Room for Upside

Costco (NASDAQ:COST) primarily engages in the management of membership warehouses.

The company currently operates 817 warehouses, 565 of which are located in the United States and Puerto Rico, while Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan, and Australia.

From an investor's perspective, what differentiates Costco from the rest of traditional retailers is its membership offering, which translates into a consistent stream of predictable cash flows.

For this reason, Costco has the ability to offer products at a great discount, which in turn maximizes customer retention, allowing for unparalleled economies of scale.

Costco's success over the years has translated into incredible shareholder returns. Simultaneously, however, shares have traded at a premium.

While I appreciate the company's unique qualities, Costco likely offers limited upside in the short term at its current valuation levels. For this reason, I am neutral on the stock. (See COST stock charts on TipRanks)

Neverending Growth

Costco recently posted its Q4 and full-year FY2021 results, marking another year of robust growth.

During the quarter, revenues increased 17.5% to $61.4 billion, from $52.3 billion last year. For the fiscal year, revenues grew 17.7% to $192.1 billion versus the previous year.

Consequently, net income for the year also grew to $5 billion (EPS of $11.27), compared to $4 billion (EPS of $9.02) in FY2020.

Out of total sales, $3.9 billion were attributed to membership fee income. The company now counts 61.7 million households, or 111.6 million cardholders, while it achieved a 91.3% renewal rate in the U.S. and Canada.

As the company continues to scale, its margins continue to expand. Despite razor-thin industry margins, Costco managed to retain its gross margins in the double digits. They expanded from 11.1% to 11.2% year-over-year.

Stock Is Not Cheap

Costco's growth has shown no signs of slowing down over the past few years, with the company's international expansion performing better than expected, especially in Asia.

As the company continues to achieve operational efficiencies and higher margins, profitability should keep snowballing in the coming years. Hence, investors have set, as always, high expectations for Costco.

Analysts now expect FY2022 EPS of around $12.05, which implies a forward P/E of 37.1. This is a considerable premium for the industry. Target (NYSE:TGT) and Walmart (NYSE:WMT), for context, trade with forward P/Es of 18 and 22.3, respectively.

On one hand, Costco's execution over the years has been phenomenal, and EPS should eventually grow into the current multiple. Still, there is little to no upside in terms of a further valuation expansion.

Rather, any potential headwinds could easily result in a valuation multiple compression. Therefore, investors' margin of safety has been compressed.

Wall Street’s Take

Turning to Wall Street, Costco has a Strong Buy consensus rating, based on 13 Buys, six Holds, and zero Sells assigned in the past three months. At $481, the average COST price target implies 7.5% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Costco: Deserved Rich Valuation, Little Room for Upside

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email