Costco Stock Review: Not a Good Value Deal

| 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

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

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

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

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Tagged: , Discount, Variety Stores
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