Costco Wholesale Corporation (COST): This Retailer’s Expensive Valuation Is Warranted!

Page 1 of 2

There’s no doubt that warehouse club operator Costco Wholesale Corporation (NASDAQ:COST) has turned in a solid performance so far this year with a gain of around 16%. The stock trades close to its 52-week high and trades at a rich valuation, which might create some doubts in the minds of investors whether Costco Wholesale Corporation (NASDAQ:COST) can keep chugging like it has done so far.

Costco Wholesale Corporation (NASDAQ:COST)

Costco trades at 24 times trailing earnings, and the ratio drops to 22 on a forward basis. The PEG ratio isn’t that handsome either at 1.81. Moreover, the company isn’t expected to grow at a rapid rate that justifies such a valuation, with analysts expecting revenue to grow 6.6% this year and 8.7% in 2014. Similarly, earnings are expected to rise 15% this year and 11% next year.

Also, the stock won’t lead you to overnight gains, as evidenced by a gain of 23% over the past year which many might consider pretty low given the high fliers we see nowadays. However, that’s the catch about Costco Wholesale Corporation (NASDAQ:COST). It’s been a stable performer and certainly deserves a place in one’s portfolio as it will go about doing its job silently and it also pays dividends (both regular and special), making for a really good combination.

Business model par excellence

Throw in a solid business model which ensures that customers keep coming back to its warehouses and with a lot of opportunity to expand, I believe Costco Wholesale Corporation (NASDAQ:COST) deserves its premium valuation and can prove to be a solid investment even at these levels.

Membership fees are a crucial part of Costco’s business strategy, not only because they bring in revenue and pump up margins, but also because they are a solid indicator of the strength of the Costco brand. For instance, the company witnessed a 12% jump in membership fees in the previous quarter to $531 million and new member signings jumped an impressive 19% from the year-ago period. The growth in fee income and members, despite fee hikes, suggests that consumers swear by what Costco offers.

As Fool analyst Andrew Marder pointed out, Costco Wholesale Corporation (NASDAQ:COST) has added 1.6 million members in the first two quarters this year, and more importantly, membership renewal rates continued to be strong. Renewal rates stayed strong at 93.9 in the previous quarter, which suggests the stickiness of the brand.

Expansion ahead

International expansion played an important part in the rise of Costco’s membership base as warehouse openings in Japan drove up the count. Costco has a lot of room to flex its muscles, both internationally and domestically. The company had 627 warehouses at the end of the previous quarter, out of which 448 were in the U.S. and Puerto Rico, 85 in Canada, 33 in Mexico, and other spread across the U.K., Japan, Taiwan, Korea, and Australia.

The company is aggressively opening more warehouses and is looking at square footage growth of 4.5% this year, up from last year’s 3%. This is certainly impressive, and given the fact that Costco Wholesale Corporation (NASDAQ:COST) is still going to open almost half of the expected 28 stores this year in the U.S. and three in Canada, it means that there is still room to grow in the North American market. Thus, it’s clear that Costco is still not moving aggressively in international markets and once it does so, there would probably be further room to run.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!