Costco is a fantastic company, but it's not one I'm personally investing in at the moment. I'll explain why. As always, we’ll do a deep dive, examining Costco Wholesale's historical performance, topline revenue growth, and bottom-line net income over the past few years. We'll also conduct a balance sheet health check, comparing total cash to total debt. Additionally, we’ll analyze their performance over the last five years against competitors, assess dividend safety, and explore key financial metrics.
We'll also discuss recent insider selling activity and look at institutional buying trends to see if they're acquiring or offloading shares. Finally, we’ll run Costco through a valuation model to determine intrinsic value and an acceptable buy price, factoring in a margin of safety. We'll also consider Wall Street's forecasts for the next 12 months.
Earning Overview
Reported strong financial results for the first quarter of fiscal year 2025, ending November 24, 2024. Net sales increased by 7.5% to $60.99 billion, up from $56.72 billion in the same period last year. Earnings per share (EPS) rose to $4.04, a 13% increase year-over-year, surpassing analysts' expectations of $3.78.
Comparable sales grew by 5.2%, with adjusted figures excluding gasoline price changes and foreign exchange impacts showing a 7.1% increase. E-commerce sales were particularly robust, rising by 13.0%.
Membership fee income also saw a significant rise, increasing by 7.8% year-over-year. This growth is notable as it follows Costco's first membership fee increase since 2017.
Fundamental Analysis
Over the past year, Costco's share price has risen over 50%. If you’ve held the stock for the last decade, you'd be up 1000% (excluding dividends). Costco is currently trading near the upper end of its 52-week range, with a yield of 0.44% and a forward P/E ratio of 58.10.
Costco has shown consistent topline revenue growth of 3% to 7% annually. In September 2019, they reported $153 billion, increasing to $242 billion in their latest annual report. This steady year-on-year growth is a positive sign.
Net Income Bottom-line net income has also shown consistent growth, increasing from $3.7 billion in 2019 to $6.3 billion in September 2023.
Cash & Short-term Investments: Increased from $9.4 billion (2019) to $17.9 billion (latest report). Total Debt: Rose slightly from $7.2 billion to $9.3 billion. Costco’s cash reserves are significantly higher than their debt, meaning they could pay off their obligations quickly if needed.
Dividend Safety Score: 99 (very safe). Dividend Growth: Double-digit increases in recent years. Costco has raised dividends for 19 consecutive years and occasionally pays special dividends (e.g., $15 per share last year). Dividend Yield: 0.44%, below the 5-year average of 0.77%, indicating overvaluation.
Guidance
Compared to competitors like Walmart, Target, Dollar Tree, and Dollar General, Costco has outperformed them over the past year by 55% (including dividends). Over the last five years, Costco remains the best performer, up 280%.
Costco Wholesale Corporation has announced plans to open 29 new warehouses during its 2025 fiscal year, which runs from September 2024 through August 2025. This expansion includes 26 brand-new warehouses and three relocations of existing ones, resulting in a net increase of 26 locations. While the majority of these warehouses will be in the United States, 12 will be in Costco's global markets. Notably, a new warehouse opened in Zaragoza, Spain, in September 2024, marking Costco's fifth location in the country.
Free Cash Flow
Costco’s free cash flow remains healthy and sustainable, supporting its growth and dividend strategies. However, low margins and high CapEx are key challenges to watch. Long-term investors can take comfort in Costco's ability to generate steady cash flow while funding expansion and rewarding shareholders.
Technical Analysis
Costco has been on a strong uptrend for most of 2024, gaining over 50% YTD and breaking through previous resistance levels. This bullish momentum has placed the stock at or near its all-time highs.
Risks to Consider
Overbought Conditions: RSI indicates potential for a correction. Valuation Concerns: High forward P/E may limit upside potential. Market Conditions: Broader market volatility could impact Costco's stock price. For Short term Potential Investors: A pullback to the $900 range could present a more favorable entry point.
Risks and Challenges
Thin Profit Margins Costco operates on very low profit margins (operating margin around 4%), relying heavily on high sales volume and membership fees. This approach is effective during stable economic times, but if sales growth slows due to economic downturns or increased competition, profitability could be at risk.
Economic Slowdown or Recession In periods of economic uncertainty or recession, consumer spending tends to decline, especially on bulk purchases and discretionary items. While Costco's bulk and value-oriented model can be resilient, an extended economic downturn could still hurt sales growth.
Inventory Management Risks Costco’s bulk-buy model means large inventory investments. If demand forecasts are inaccurate or consumer preferences shift, Costco could face overstocking or under-stocking issues, impacting profitability.
Inflation and Pricing Pressures Rising costs for goods, shipping, and labor can lead to higher prices. While Costco is known for value pricing, significant inflation could force price increases, potentially reducing customer loyalty.
Valuation
As of December 14, 2024, Costco Wholesale Corporation (COST) is trading at $989.35 per share, reflecting a year-to-date increase of approximately 51.8%. In its fiscal first quarter of 2025, Costco reported earnings per share of $4.04, a 13% increase year-over-year, and revenue of $62.2 billion, up 8% from the same period last year. Same-store sales rose by 7.1%, and e-commerce sales grew by 13%. Additionally, membership fee income increased by 7.8%. Analysts have raised their 12-month price targets for Costco, with some exceeding $1,000 per share. Jefferies, for instance, maintains a buy rating with a price target of $1,145, citing increased warehouse traffic and positive digital sales trends.
Costco’s forward P/E of 58.1 is well above its 5-year average of 39.4 and the industry average of 23.1. The Discounted Cash Flow (DCF) valuation gives an intrinsic value of $671, while the current trading price is around $989. Even with a 10% margin of safety, the acceptable buy price would be approximately $640.
Market sentiment
Insider Selling: Recent sales by executives and directors, though share prices have continued to rise post-sale.
Institutional Ownership: Stands at 66%. However, institutions have sold more shares than they've bought in the past year, particularly in Q2 (a $29 billion sell-off). Some buying resumed in Q3 and Q4.
Analysts project earnings of $18.05 per share for the fiscal year ending August 2025, indicating a 9% increase. Additionally, Costco's decision to cease year-round book sales has sparked mixed reactions among consumers, though it's not expected to significantly impact overall financial performance.
Conclusion
Despite these strong financials, some analysts express caution regarding Costco's valuation, noting that the stock is trading near all-time highs. As of December 14, 2024, Costco's stock closed at $989.35, reflecting a year-to-date increase of approximately 50%. Overall, Costco's Q1 2025 performance demonstrates its resilience and ability to adapt to market conditions, with significant growth in both sales and membership income.
While Costco is a high-quality company with strong financials and steady growth, I believe it is currently overvalued. Although its share price may continue to climb, I’m waiting for a more favorable entry point before investing. Wall Street's 12-month price target suggests no significant upside from the current level.
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Comments
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