I'd Love To Buy Costco, But Not At This Price

| About: Costco Wholesale (COST)


A low dividend of 1.20% means this is not a stock for investors looking for income.

Revenue and EPS have grown by high-single digits over the past 5 years.

Its balance sheet looks very good, with a current ratio of 1.19 and a low level of long-term debt.

I'd love to buy some shares, but not at a price-to-earnings ratio of 26.7.

Costco Wholesale Corporation (NASDAQ:COST) operates 655 warehouses worldwide, 464 of which are in the United States. In its most recent quarterly report, it announced total revenues were $25.79 billion, an increase of 7.1% to the same quarter last year. Net sales for the month of July were $8.55 billion, which is an increase of 9% to last year's $7.87 billion.

COST Revenue (5-Year Growth) data by YCharts

Costco's 5-year revenue growth rate stands at 7.73%, which is quite reasonable, especially considering the fact its largest competitor, Wal-Mart (NYSE:WMT), has had average revenue growth of only 3.33% in the same time frame. Analysts expect Costco's revenue to reach $112.27 billion in the current fiscal year, which would be an increase of 6.76% to last year's $105.16 billion. This means Costco's forward price-to-sales ratio stands at 0.5 at the current market cap of $51.82.

COST Normalized Diluted EPS (TTM) data by YCharts

Costco's 5-year earnings growth rate stands at 9.89%, which is very impressive considering the fact Wal-Mart, its largest competitor had average EPS growth of only 7.68% in the same time frame. For the current fiscal year, analysts expect Costco to have earnings per share of $4.59, which is an increase of only 2.2% to last year's $4.49. However, the EPS is expected to grow quite a bit more in fiscal year 2015, to $5.15. Costco is currently trading at 26.2 times last year's earnings, which is quite a bit higher than its 5-year average P/E ratio of 24.5.

Currently paying a dividend of only 1.20%, Costco isn't a great stock for investors looking for income-generating stocks. However, the dividend has grown at a very decent rate in recent years, having gone from only $0.55 in fiscal year 2007 to $1.17 in the most recent fiscal year. That's a 113% increase in only 6 years. The most recent dividend increase was announced in April, when the company increased its quarterly payments from $0.31 to $0.355, a 14.5% increase. The payout ratio is quite low. The company paid out 25.3% in the most recent fiscal year.

COST Total Current Assets (Quarterly) data by YCharts

Costco's current assets exceed its current liabilities by $2.84 billion, giving the company a current ratio of 1.19, which is pretty good. The quick ratio is a lot lower, at only 0.47, which is due to the fact Costco has close to $8.5 billion in inventories. The company's long-term debt stands at only $4.99 billion, which is not a level that would concern me, considering the company has had close to $2 billion in net income in the most recent twelve months.


Costco's 5-year revenue and EPS growth rates both stand in high-single digits, which is quite impressive. The balance sheet looks very healthy, with a current ratio of 1.19. The dividend has grown at a very impressive rate in recent years, and the low payout ratio and high earnings growth expectations lead me to believe it will continue to grow. However, as is often the case with high-quality companies, Costco is trading at a very high price-to-earnings ratio. I really want to buy some shares in COST, but I'll be waiting for a pullback to historical P/E levels. The 5-year average P/E ratio stands at 24.5, but I'd like a small safety margin, so I'll be buying as soon as the price-to-earnings ratio drops below 22. This would mean the stock would have to drop to $98.78 before I'll consider buying it. At that level, the $0.355 quarterly dividend would give me a yield on cost of 1.44%. There have been several opportunities in the past decade to buy COST at a P/E of 22 or lower, as can be seen in the graph below, and I'm willing to wait a few years, if necessary.

COST PE Ratio (TTM) data by YCharts

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.