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The Hidden Margin Expansion Opportunity At Costco: 40% Upside

Mar. 09, 2021 9:45 AM ETCostco Wholesale Corporation (COST)66 Comments


  • COST reported strong double-digit comparable sales during the pandemic.
  • At first glance, the stock looks expensive at 32 times trailing earnings.
  • The future may see margin expansion and a leveraged stock buyback.
  • I rate shares a strong buy with 40% total return upside.
  • Looking for a portfolio of ideas like this one? Members of Best Of Breed get exclusive access to our model portfolio. Learn More »

Costco (NASDAQ:COST) was a huge beneficiary of the pandemic, as its stores were, for at least a brief period of time, one of the only places you could buy toilet paper. Yet the stock is relatively unchanged to where it traded just prior to the pandemic. I suspect that the poor stock performance may have to do with general misunderstanding regarding the long-term prospects of the company: while COST has been able to churn out solid double-digit bottom line growth over the past several years, the real money has yet to be made.

I view COST as having tremendous growth potential from eventual margin expansion. Wall Street also appears to be sleeping on the company’s ability to take on significantly more leverage. I rate shares a strong buy.

(2020 Annual Report)

Margin Expansion Story

Even nearly a year after the onset of the pandemic, COST has continued delivering strong results. The latest quarter ended this February saw comparable sales growth of 12.9% including 74.8% e-commerce growth. Yet consider that the stock has given up most of its 2020 gains and now trades just a hair above where it did 1 year prior:

(Yahoo Finance)

The problem appears to be twofold. First, COST is likely to see deceleration in growth following the pandemic, as consumers may increase their shopping elsewhere. Second, COST trades at 32 times trailing earnings, which appears to be a rich multiple in light of its historical low double-digit earnings growth rate. It’s difficult to predict to what extent its growth rate will be impacted beyond the pandemic, but it’s worth noting that COST reported 4.3% comparable sales growth in the quarter prior to the pandemic.

It’s the second point that is more interesting. COST is well known to offer lower prices than competitors (hence the company name). Consider that COST

The High Conviction List

COST has been a market-beater over the past decade, and the next decade may be even more promising.

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This article was written by

Julian Lin profile picture
High conviction investment ideas in the winners of tomorrow.

Julian Lin is a top ranked financial analyst. Julian Lin runs Best Of Breed Growth Stocks, a research service uncovering high conviction ideas in the winners of tomorrow. 

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Analyst’s Disclosure: I am/we are long COST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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