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Costco Wholesale (COST -2.24%) is one of the most famous retail success stories of the early 21st century. The retail giant has expanded into nearly every state and many countries around the world, succeeding where many of its peers have failed.
Indeed, the stock’s rich price-to-earnings (P/E) ratio of 36 makes it more valuable than all of its peers except Amazon. That may have prompted Warren Buffett’s Berkshire Hathaway to drop its position in Costco, even though Buffett’s partner, Charlie Munger, sits on Costco’s board.
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However, given its ability to grow in almost any environment, investors should be optimistic about Costco’s long-term growth. Here’s why.
Americans are worried about the economy amid stubborn inflation and massive layoffs. Costco’s economic conditions are not affected at all. However, in this seller, such conditions usually slow rather than stop growth.
In the first two quarters of fiscal 2023 (ended Feb. 12), Costco’s total revenue was just under $110 billion, up 7% from the first half of fiscal 2022. This is a 16% year-over-year increase. Income for the first two. years. However, the 2022 quarter offers the opportunity for higher sales despite Costco’s challenges.
In fact, Costco is one of the largest grocers in the country, and the fact that people need to eat regardless of the economy keeps its share strong. However, Costco’s low prices and ability to wholesale appeal to budget-conscious consumers, thus encouraging more sales.
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This development also highlights another strong attribute of Costco: customer loyalty. Its customers renewed membership by 93% in the US and 91% worldwide in the second quarter, indicating high levels of satisfaction.
Of course, Costco’s success is no secret, and its stock is worth more than most of its peers. But with continued growth and customer loyalty, this irresistible business is likely to maintain its premium value.
However, the most important attribute for investors is Costco’s ability to expand. In the US, it has 584 warehouses in 46 states. Despite these numbers, it is far from saturated.
First, in many states, Costco operates warehouses in major metro areas. For example, it has 33 locations in its home state of Washington, D.C., but only 30 in Florida, a state with nearly three times the size of Washington. This represents an opportunity to add warehouses in metro areas in Florida and other states.
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In addition, it began building Costco business centers, which, as the name suggests, provide direct services to businesses. With more than half of its locations west of the Rocky Mountains, the company will add business centers in the coming years.
However, the most significant development can be added to the 265 warehouses located in 13 foreign countries on four continents. Costco has successfully overcome cultural barriers in these countries that have held back many of its competitors.
Target has failed in Canada and still has no stores outside of the U.S. Walmart, has suffered embarrassing setbacks in places like Germany and Brazil, and despite early market penetration, it operates without 400 stores in the large Chinese market. Also, Home Depot hasn’t entered North America since exiting China and South America a few years ago.
The international failure of Costco’s competitors calls into question the long-term expansion prospects of these companies. Because Costco doesn’t have those concerns, it removes the doubt that could hamper the stock’s rally.
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Because of Costco’s success in almost every environment, it will dominate the market for the next five years. Indeed, growth rates have slowed in recent quarters, and Consumers’ high P/E ratio may deter investors.
But despite its size, Costco is years away from US saturation. For decades, it has been able to expand around the world, overcoming cultural barriers that hindered competitors. These factors and strong growth potential should continue to drive interest in Costco stock.
John Mack, former CEO of Amazon’s Whole Foods Market, is a member of The Motley Fool’s board of directors. Will Haley holds positions in Berkshire Hathaway. Motley has positions in Amazon.com, Berkshire Hathaway, Costco Wholesale, Home Depot, Target and Walmart. There are various opening policies.
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If I could buy 1 share it would be a $1000 buy at 5.6% – using the dividend stock – there are strong moving buying opportunities in the once-a-decade bull market First Republic was silent. . There may be news before the start of earnings
Better to invest in The Motley Fool. Get stock recommendations, portfolio guides and more from the Motley Fool’s premium services. The leading retailer reported a 1.1% decline in same-store sales, while net sales rose 0.5% to $21.5 billion. Additionally, Costco’s average transaction volume fell 5.8% from February.
Additionally, Costco’s e-commerce PC sales fell 12.7%, although international PC sales rose 2%. Additionally, the company suffered a 2% negative impact from “gas price deflation” as Costco experienced lower energy prices in March.
However, crude oil prices ( CL1:COM , USO ) have recovered significantly following OPEC+ cuts, which should underpin further selling.
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We warned investors in November 2022 that it would be tough for Costco in 2023. Inflation and weak consumer spending could further weigh on Costco’s performance in 2023.
Therefore, COST stock has underperformed the S&P 500 (SPX, SPY) in three of its previous sell-off periods (May, June and November). This means that our sellers continue to sell COST at relevant resistance levels, even as buyers try to increase buying support.
Costco shoppers can focus on the company’s broad economy line, giving it a significant cost advantage and a more stable business model. Additionally, the ability to store SKUs below 4K in stores helps the company maintain a competitive edge for its members, which is critical to operational profitability.
That said, Costco’s ability to protect margins and profits should continue to attract buyers at the right valuation.
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Therefore, Costco’s net income is expected to grow by 7.4% in FY23 (to August 2023), which is lower than in the previous two fiscal years. Therefore, investors should not be surprised to see COST down 20% from its peak in April 2022.
However, we believe that sustaining EBIT margin over the cycle is one of the critical factors that underpins the company’s broad rating. As such, we view Wall Street analysts’ EBIT margin estimates as credible, given Costco’s conservative operating model.
With this in mind, it also reduces the risk of performing COST price modeling, which helps investors assess whether they should buy COST now.
Trefis shares or SOTP’s valuation base places 47% of its SOTP in the US segment, while the membership fee segment accounts for 13%. As such, Costco’s focus on US comp sales is likely to be critical to valuation.
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Additionally, COST’s combined fair value estimate suggests that investors may not have a large margin of safety if they choose to invest in COST now.
While some COST bulls may argue that it is profitable to buy large businesses at fair value, we believe it is important to provide a margin of safety for their purchase levels.
Additionally, COST last traded at an NTM-adjusted P/E of about 33x, compared to an average of 20.3x for its peers ( XLP ). Although lower than last year, it is 30 times higher than the 10-year average.
That said, some investors should argue that a Hold rating may be appropriate. However, our sell rating is supported by the reduced exposure thesis, which suggests that investors will take the opportunity to increase exposure to COST if it breaks through the 2020 lows.
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Therefore, investors short of Costco Wholesale Corporation should expect COST to decline slightly more than its average valuation. In addition, they may also consider a wider margin of safety for downside performance risks in FY23 if consumer spending weakens more strongly than expected.
Important Note: Investors are reminded to exercise their own due diligence and not to rely on any information provided as financial advice. The rating also does not take into account the specific entry/exit time at the entry point.
Do you notice a critical difference in our thesis? He saw
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