Costco Stock Review: Not a Good Value Deal

Nov.10.10 | About: Costco Wholesale (COST)

Costco (NASDAQ:COST) is the third largest retailer in the US, operating ~400 stores in the US, 80 in Canada and another 50 in other countries. Costco has 56 million members. I am reviewing Costco as part of my “tour” review of US retailers (discount stores, drugstores and grocery stores). Over the last month the stock has been trading between $61 and $65.

Please refer to the stock review explained post if you would like to know more about what I look for in this analysis. Click on this annotated Surfmark if you want to see the source data for this stock review.

1- Business Performance Risk (-) and intrinsic returns (-)



FCF / Sales

Last Twelve Months: 2.2%, higher than all previous 10 years except 2004. COST FCF/Sales has historically been between 0.8% and 1.5% with 3 negative years in 200-2002!


LTM: 12.2% in line with historical performance over the last 10 years, between 11.3% and 12.5% in most years. Over the last 5-years, the average ROE was 12.6%


LTM: 5.5%, in line with historical performance, between 5.1% and 6.7% in most years. Over the last 5-years, the average ROA was 6.1%

Revenue Growth

Except for 2009, growth has been consistent with yoy growth rates in the 7% to 13% range. In 2009, revenue declined! but are now back on track with a TTM growth rate of 12.5%.

The 3-year average growth rate is 5.9% which I will use as a "projections" for future returns.

Cash distribution to shareholders

Costco pays a small dividend yielding 1.2% to its investors on a ~25% dividend payout ratio

Over the last 5 years, COST bought back 10% of its stock

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While COST has been performing decently, it doesn’t meet my criteria in terms of ROE/ROA nor FCF/Sales. While I am happy to look past my criteria to consider industry specificities such as low FCF/sales, COST is performing below WMT on these criteria, and has not been growing faster either!

In terms of intrinsic returns, COST could deliver the following:

  • 1.2% dividend yield, using 25% of earnings
  • Growth rate of 6% (in line with 3 years average) which using a ROE of 12% would use 50% of earnings
  • 1.1% buybacks with the 25% of earnings remaining, using the current earnings yield of 4.4%

All in all, COST’s intrinsic returns at this point sums up to barely over 8%, much lower than my minimum threshold of 10%!

2- Balance Sheet Risk (+)



LT Debt / Equity


Current Ratio

1.2x, in line with previous years

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COST carries relatively little debt and while its current ratio is on the low end in general it appears conservative compared to other industry players.

3- Valuation Risk (-)



Cash Return



22.8x, much higher than the industry and S&P and in line with the average over the last 5 years

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COST valuation appears a bit rich to me, with a cash return below 7% and a high P/E of 23x (more than 1.5x the average of the S&P)!

I am skeptical/disappointed at COST’s business performance which is enough for me to not pursue this stock further. In addition the current high valuation is also clearly not appealing to me as I don’t see how I could have a Margin of Safety if I were to invest. I will not perform a stock analysis of COST.

Many happy returns!

Disclosure: No Position