Costco Wholesale, the membership-only retailer, is renowned for its well-managed operations and loyal customer base. However, when it comes to investing in Costco’s stock, the decision becomes more complex due to its seemingly expensive valuation. This article examines Costco’s recent performance and financial metrics to determine whether investors should buy, sell, or hold the company’s stock.
Stock Market Outperformance
Over the past decade, Costco’s stock has outperformed the benchmark S&P 500, achieving a total return of 490%, more than double the S&P 500’s 223%. It has also surpassed the returns of competitors Target and Walmart, with respective returns of 341% and 335%. This success can be attributed to Costco’s consistent growth and a strong balance sheet.
Steady Growth and Financial Strength
Costco’s success lies in its profitable membership model, generating substantial revenue from its 69 million members. The company continues to expand its membership base, resulting in approximately $4 billion in annual revenue. Furthermore, future membership price hikes are expected to drive higher revenue and earnings growth.
A key advantage for Costco is its negative net debt, indicating a strong financial position compared to competitors Target and Walmart. This liquidity allows Costco to navigate economic downturns effectively without being burdened by high-interest-rate loans.
Longtime Dividend Payer
Costco’s financial stability enables it to return capital to shareholders through dividends. While the quarterly dividend yield of 0.72% may seem modest, the company has consistently increased its dividend since its inception in 2004. Additionally, Costco has a history of issuing special cash dividends periodically, which adds value for shareholders.
The Expensive Valuation Dilemma
The primary concern for potential investors is Costco’s expensive valuation. Its price-to-earnings (P/E) ratio of 41.6 is higher than that of its competitors, indicating that the stock is currently priced on the high side. Comparing it to its five-year average P/E ratio of 37.2 further supports this observation.
Charlie Munger’s Perspective
Charlie Munger, an esteemed investor and Berkshire Hathaway Vice Chairman, praises Costco as a “perfect [expletive] company” but acknowledges its expensive valuation as the only flaw. He recommends keeping an eye on the stock’s valuation and considering a purchase when it trades below its historical average.
Conclusion
Costco’s stock has demonstrated exceptional performance over the past decade, surpassing its competitors and the broader market. However, its expensive valuation remains a challenge for potential investors. While Charlie Munger extols the company’s virtues, he acknowledges the importance of timing in acquiring the stock at a reasonable price. As the stock currently trades above its historical average, it may be prudent for investors to hold off on purchasing Costco stock until an opportune moment arises. By closely monitoring the stock’s valuation, investors can make informed decisions about whether to buy, sell, or hold Costco’s shares in their portfolios.
