Mike Goodson of Vestopia Inc. published a great article on March 11, 2008 on Costco at the Seeking Alpha portal. According to Mike, Costco is a "great value" despite recent downgrade. Mike has a solid outlook on the long term potential of Costco, and is great at painting an objective yet colorful picture ("my contrarian spidey sense begins to tingle") with all the relevant facts. Here are
7 reasons to bet on Costco for the long term:
1. "It seems that COST is a stock everyone would love to love but the perceived high P/E is keeping analysts on the sidelines. Yet the lowest target price I could find was $60 -- right about where the stock is now." - This means a solid innovator such as Costco is trading around the best available value in the market today.
2. "The sell-side consensus target price is the just below the mid-point of these numbers (price targets of $68.54 (23x '08) and $78.89 (23x '09) simply using historical average P/Es) = $71. Although the consensus recommendation is "hold," the consensus target price implies upside of 17% from the current level." - Upside. Only Upside. At current price point, Costco is a great value, and if Costco continues to deliver, its stock can only go up.
3. "What about the recession? ...It seems to me that the shares could already be near a bottom even if a recession is around the corner. Why would all the analysts who rate the shares "hold" have unreasonably high EPS estimates?" - Analysts are conservatively bullish on Costco. Conservative owing to the current state of the retail economy which will rebound in the 2nd half of 2008. Is Costco a recession bell-weather? If Wal-Mart can deliver solid results, Costco sure can.
4. "Operationally, the company seems to march along with little regard to the economy. ...The company currently operates 529 stores, having opened up about 30 new stores in 2007. In 2008, it plans to open about 30 new stores again...." - Costco management is not slowing their 2008 expansion plans. Actually, the management is marching forward regardless of the economy . And Costco customers are not slowing their buying either. Costco calls its customers "members", and offers three types of memberships - Gold Star (individual), Business and Executive. As of February 2008, Costco claimed over 51 million members, paying $50 or less in annual membership, generating about $1.4 billion in annual membership dues. Importantly, according to Costco, there is a strong membership loyalty and renewal, and members more often than not refer new members. Costco 2007 sales revenue was $63.1 billion, growing over 10% to 12% annually.
5. "The historical 5-yr EPS CAGR (compound annual growth rate) is around 12% and the consensus future EPS expected growth is 13.6%. Why would anyone pay 20x for a stock growing earnings at 13-14%? I can see two reasons: 1) earnings consistency and 2) higher earnings potential. If one looks back at the last 12 quarters, the company has not logged a negative earnings surprise. To me, this suggests the company has a very tight handle on its costs and revenues." - Costco has shown great poise during the past 12 quarters, always meeting or beating the earnings estimates. This is a healthy sign of a company that knows how to manage investor expectations and grow at the same time.
6. The only downside is perhaps the gross and operating margins compared to its peers. "COST's gross margin is only 12.4% vs. Wal-Mart's 23.5% and Target's 32.6%. Operating margins for the three firms are 2.6%, 5.8% and 7.3%, respectively." - Is this a real issue?
According to Jim Sinegal, the Company's President and Chief Executive Officer, "Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members."
Costco's margins are lower because it provides better prices to its customers and higher wages to its employees. It's employee satisfaction is among the highest in the retail industry.
"In 2005, the average pay of a Wal-Mart employee was just 60.5% of their average Costco counterpart (2005 Labor Research Association.) Wal-Mart experienced an estimated turnover rate of 50%, as compared to just 24% by Costco in the same year (2005 Labor Research Association.)"
7. Costco Innovations
Costco has grown its lead in key retail segments by offering great prices, convenience, and "treasure hunt" shopping atmosphere. In 2007, Costco generated $456 million of U.S. Fine Wine sales, racked up $1.9 billion in TV sales, had a growing electronics business, showed substantial increase in diamond business with sales of 105,000 carats, sold over $550 million of Seafood, grew the chicken business from practically nothing to $173 million, provided 27.9 million prescriptions through its pharmacy, sold over 2.4 million pairs of glasses, processed 1.3 billion prints through the One Hour photo service, and 69.3 million hotdog and sodas. What are the new innovative growth segments? Costco Gas, Costco Car Wash, Costco.com (online business), Costco Travel and Costco Home. Costco Home promises to provide high-end name brand furnishings for a home at the lowest price. We believe some of these new innovations from Costco will provide 2% to 5% incremental revenue in 2008, and potentially grow into high growth segments in 2009.
Innovation Index Group rates Costco a Long-term Buy with Q4, 2008 price target of $80.
Consumer Innovation Best Practices
Creativity And Innovation Best Practices
The Innovation Index Reports:
Invest in The Innovation Index - Innovation Index Fund tracks The Innovation Index
The Innovation Index closes 2007 at 66% - 2007 Annual Report on the Innovation Index
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Innovative Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
About The Innovation Index
The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in
The Innovation Index returned 66% in 2007, and returned 174% over the previous five years (2002-2006). This assumes equal investment in each stock of The Innovation Index as of December 31, 2001. An average of $100 invested in The Innovation Index on December 31, 2001 returned $454 as of December 31, 2007. By comparison, $100 invested in S & P 500 returned 28% or $129, $100 invested in NASDAQ returned 34% or $136, and $100 invested in the Dow Jones Index returned 30% or $131 through December 31, 2007. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by more than seven times over the past six years.
Alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols:
3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)
The Innovation Index will analyze the positions and standings of the Top 20 Innovators at the end of each year. For 2008, there will be no further changes in The Innovation Index.
Disclaimer: The Innovation Index Group, Inc. invests in the stocks comprising The Innovation Index.References:
Costco - A Great Value - Seeking Alpha
Costco Press Releases
Costco Earnings and Annual Reports