Costco (COST) $ 801 HOLD
Costco has a lot of positives:
- Stable, steady, sustainable, and predictable revenue growth of about 5% a year. The business model has strong competitive advantages as the entrenched market leader – BJ’s is a distant competitor and I cannot imagine anyone coming in to even remotely rival Costco in the future.
- The company has a growing membership base, which is its crown jewel and is expanding its physical locations at a slow but steady pace. They’re very careful and don’t increase more than 30 stores a year.
- Costco’s operational metrics translate into higher profits – profits also grow predictably at 8-10% each year, faster than revenues.
The big negative is the valuation
- Costco is an exceptional business and therefore always commands a premium. However, currently, it is priced at 49x 2024 EPS.
- Trading at a historically high premium over the market,
- Historically high PEG – With a growth of 10% the PEG ratio works out to 4.9 (49/10)
- Outside of its elevated trading range of 35x earnings.
- The best and perhaps the only time to invest in COSTCO is on major declines otherwise the return on investment would be too low, or we could even lose money if the stock drops from here or stays sideways for a while.
- Let’s see if there is a drop post-earnings – I’ll update again.