COST Market Research & Analysis Report
Updated Jul 21, 2015

Growth and Balance Sheet

The company reported net income of $516 million, or $1.17 diluted earnings per share, for the third quarter of fiscal year 2015 ending May 10. That's up from net income of $473 million, or $1.07 diluted earnings per share for the same quarter last fiscal year. Revenues for the third quarter were $26,101 million, up from $25,794 million for the same quarter last fiscal year. Comparable sales for the twelve weeks period were down 1%, primarily due to the International segment which was down 6%. However, excluding the negative impact from gasoline price deflation, comparable sales were up 6% in comparison to the same quarter last year. Costco currently operates 673 warehouses, including 474 in the US and Porto Rico, 89 in Canada, 35 in Mexico, 26 in the UK, 20 in Japan, 11 in Korea, 10 in Taiwan, 7 in Australia, and 1 in Spain. Company’s gross margin increased 47 basis points to 11.09% of sales from 10.62% for the third quarter of last fiscal year, primarily due to increase in softlines and food and sundries. The operating margin improved to 3.15% of sales from 2.86% in the third quarter of last fiscal year. Net cash provided by operating activities for the 36 weeks ending May 10, 2015 was $3,257 million, up from $3,142 million for the same period last fiscal year. Cash and cash equivalents as of May 10, 2015 were $5,063 million, in comparison to $5,738 million as of August 31, 2014. COST forecasted EPS for the fourth quarter of fiscal year 2015 are expected to be from $1.61 to $1.73, compared to actual EPS of $1.58 for the fourth quarter of last fiscal year. The financial strength indicators of the company are at satisfactory levels. Company’s current ratio is 1.05 and the industry average ratio is 1.15. The quick ratio of 0.52 is also in line with the industry average of 0.56. The interest coverage ratio of 96.34 is below the industry average of 437.34, but it is still at very healthy levels. In terms of efficiency and effectiveness, the asset turnover ratio of 3.50 is better than the industry average of 1.83; the inventory turnover ratio of 11.64 is at much better levels than the industry average ratio of 7.15; and the ROE of 20.46% is better than the industry average of 17.4%. 

Valuation

COST PE stands at 27.79 below the industry average of 31.31, but above the stock market average represented by the S&P 500 P/E of 21.24. The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 18.60x to 25.20x trailing 12-month earnings. COST's current Price/Sales of 0.55 is below the average of its industry of 1.04. COST’s head to head comparison to its main competitors shows that the company has the lowest gross margin, and one that is below the industry average. The achieved operating margin of the company is the worst result in comparison to the selected competitors, and also below the industry average. The company has shown modest quarterly revenue growth of 1%, which is better result than WMT growth for the quarter, but below TGT’s growth, and it is below the industry average of 7%. The company trades at higher P/E in comparison to WMT, and the P/S ratio of the company is average in comparison to its peers. COST’s twelve trailing months EBITDA is $4.66 billion, lowest result than both of the selected peers’ results, but above the industry average EBITDA of $1.29 billion. The stock is currently trading below its intrinsic value of $164.73, this suggests that the stock is currently undervalued at these levels. The beta of 0.76 implies lower volatility of the stock with respect to the S&P 500. COST has shown favorable earnings consistency over the last five years. Company’s earnings have increased by 13.51% over the same period. The current quarter earnings in comparison to the same quarter last year have increased by 9.35%. COST’s Total Debt/Equity of 55.72 is above the required maximum, but it is below the industry average of 60.8. COST’s current price levels are below the maximum level, 7.53% below the 52 week high of $156.85, and the technical analysis give neutral to positive view of the stock. The majority of analyst ratings are outperform. COST has a twelve trailing month dividend payout ratio of 28% and a trailing annual dividend yield of 4.20%.

About COST

Costco Wholesale Corporation (Costco) is engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, and through majority-owned subsidiaries in Taiwan and Korea. The Company operated 663 membership warehouses and an average warehouse is approximately 144,000 square feet. The Company’s warehouses generally operate on a seven-day, 69-hour week. The Company’s product categories include Food, Sundries, Hardlines, Fresh Food, Softlines, Ancillary and Other. The Company’s online business provides products, which include services, such as photo processing, pharmacy, travel, business delivery, and membership services.

Competitor Comparison

Costco Wholesale Corporation (NasdaqGS: COST) N.V.

Highlights

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The stock closed yesterday’s trading session at $145.04. In the past year, the stock has hit a 52-week low of $116.61 and 52-week high of $156.85. The intrinsic value of the stock is above the current price. COST has a market cap of $63.74 billion and is part of the Services sector.

• Price positioning leads to increased customer loyalty
• Low cost operating model and sustainability initiatives
• Strong financial position  

• Limited product choice
• Overdependence on the US and Canadian market      

COST Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. COST's 52 week high is $156.85, current price is $145.04, is 7.53% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 27.79, the average industry P/E ratio is 31.31, and is above the S&P 500 P/E ratio of 21.24.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.  Insiders own 0.81% of COST stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

COST is trading in the range of $134.74 - $145.22 in the past 30 days. The stock has been showing support around the level of $135 and resistance in the $154 range. The stock is trading above the 50-Day Moving Average and above the 200-Day Moving Average. The RSI(14) is 65.26. After trading for a year in bullish trend, in March the stock hit its all-time high of $154.23. The upward trend was followed by three months of plummeting, until the stock found support around $134 – a support level from January and December last year. Since then the stock has recovered and the bears seems to be over with the stock for now. Our indicators give neutral to positive view of COST.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com are 9 Buy, 11 Outperform, and 9 Hold.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. COST’s annual EPS for the last 5 years were 2.92, 3.30, 3.89, 4.63, and 4.65 this type of earnings action is favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. COST’s Total Debt/Equity of 55.72 is above the required maximum, but it is below the industry average of 60.8.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. COST’s EPS growth for this quarter relative to the same quarter a year earlier is 9.35%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. COST’s annual earnings growth rate over the past five years is 13.51%, above our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.