Costco stock analysis. COST stock. April 2023
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Legendary investor Charlie Munger has shared that he’s addicted to Costco. His friend, Warren Buffett, had a position in the company until the end of 2020. And it’s been one of the best performing stocks of the last 30 years.
Today the company is worth 217 billion dollars so what makes Costco such a good business?
For one, it takes care of its stakeholders.
Employees are fairly compensated, and even though Costco is the 3rd biggest retailer behind Walmart and Amazon, they provide superior experience through a commitment to affordable prices.
A great example is the Costco hot dog. Despite rampant inflation, a Costco hot dog and soda costs the same as it did back in 1985 at just $1.50.
Another example is Costco’s rotiserrie chickens which sell for only 4.99.
These products are known as loss leaders. They lose Costco money individually, but the low prices get customers in the door and also drive memberships.
And Costco owns its own poultry farms in order to keep its prices low.
Costco’s financial performance has been remarkably consistent. Their revenue has more than doubled from $113 billion back in 2014 to $234 billion over the last twelve months.
Analysts are projecting growth of around 6-7% for the next 3 years, which is still impressive considering the size of the business.
As mentioned, memberships have proven to be incredibly good for Costco’s business, not only attracting new customers but also ensuring they continue to shop in their stores.
But, due to the nature of the business, their operating margin is fairly low at around 3%. This translates to around $8 billion in operating profit for the last twelve months and 6.1 billion in net income.
#stocks #investing #stockmarket #stockstobuy
Visit our Substack for more: https://www.overlookedalpha.com
Legendary investor Charlie Munger has shared that he’s addicted to Costco. His friend, Warren Buffett, had a position in the company until the end of 2020. And it’s been one of the best performing stocks of the last 30 years.
Today the company is worth 217 billion dollars so what makes Costco such a good business?
For one, it takes care of its stakeholders.
Employees are fairly compensated, and even though Costco is the 3rd biggest retailer behind Walmart and Amazon, they provide superior experience through a commitment to affordable prices.
A great example is the Costco hot dog. Despite rampant inflation, a Costco hot dog and soda costs the same as it did back in 1985 at just $1.50.
Another example is Costco’s rotiserrie chickens which sell for only 4.99.
These products are known as loss leaders. They lose Costco money individually, but the low prices get customers in the door and also drive memberships.
And Costco owns its own poultry farms in order to keep its prices low.
Costco’s financial performance has been remarkably consistent. Their revenue has more than doubled from $113 billion back in 2014 to $234 billion over the last twelve months.
Analysts are projecting growth of around 6-7% for the next 3 years, which is still impressive considering the size of the business.
As mentioned, memberships have proven to be incredibly good for Costco’s business, not only attracting new customers but also ensuring they continue to shop in their stores.
But, due to the nature of the business, their operating margin is fairly low at around 3%. This translates to around $8 billion in operating profit for the last twelve months and 6.1 billion in net income.
#stocks #investing #stockmarket #stockstobuy
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NewsTranscript
00:00 Should You Buy Costco Stock? Legendary investor Charlie Munger has shared
00:04 that he's addicted to Costco. His friend Warren Buffett had a position in the company until the
00:09 end of 2020 and it's been one of the best performing stocks of the last 30 years. Today the company is
00:16 worth $217 billion. So what makes Costco such a good business? For one, it takes care of its
00:23 stakeholders. Employees are fairly compensated and even though Costco is the third biggest retailer,
00:29 behind Walmart and Amazon, they provide superior experience through a commitment to affordable
00:34 prices. A great example is the Costco hot dog. Despite rampant inflation, a Costco hot dog and
00:41 soda cost the same as it did back in 1985 at just $1.50. Another example is Costco's rotisserie
00:48 chickens which sell for only $4.99. These products are known as loss leaders. They lose Costco money
00:54 individually but the low prices get customers in the door and also drive memberships. Costco owns
01:00 its own poultry farm in order to keep its prices low. Costco's financial performance has been
01:05 remarkably consistent. The revenue has more than doubled from $113 billion back in 2014 to $234
01:13 billion over the last 12 months. Analysts are projecting growth of around 6-7% for the next
01:19 three years which is still impressive considering the size of the business. Memberships have proven
01:25 to be incredibly good for Costco's business, not only attracting new customers but also ensuring
01:30 they continue to shop in their stores. But due to the nature of the business, their operating margin
01:36 is fairly low at around 3%. This translates to around $8 billion in operating profit for the last
01:42 12 months and $6.1 billion in net income. Costco's enterprise value is $211 billion which leads to
01:49 multiples much higher than competitors. The enterprise value to EBITDA is 21.3 and the PE
01:55 ratio is 35.9. So investors trust the quality of the business and are willing to pay a premium to
02:02 own Costco shares. But the high premium does have a negative impact on future returns, especially
02:08 if public sentiment towards Costco should change. For example, if you assume Costco continues to
02:14 grow earnings at its historical average rate of 12% per year, that would mean net income in 10
02:20 years time would be roughly $19 billion. A 25 times multiple on that figure gets us to a market
02:26 cap of $473 billion in 10 years time. That works out to an investment return of 9% per year over
02:33 that period including dividends. So this basic estimate shows that Costco shares are pretty
02:39 fairly valued and there's not much margin of safety there. One of the questions that arise
02:43 when it comes to Costco is what's next. The company is fairly established in the US and Canada
02:49 and there isn't that much room to grow. If they can nail international markets then Costco could
02:54 have more growth ahead, but international expansion is always tricky and the stock
02:59 doesn't leave much room for error. I believe it's best to buy the stock on the dip, which is why I
03:04 give it a neutral rating, but these are my personal opinions not financial advice and I do own a small
03:09 position in Costco stock.