Costco Wholesale Corp

NASDAQ:COST   11:28:04 AM EDT
542.76
+3.38 (+0.63%)
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Why Costco Is Incredible; But Serious Danger Lurks



Fundamentals


##Symbol##COST

Costco (COST) is the third largest retailer in the United States by revenue. It has the second strongest fundamental rating out of the entire food and staples retailing sector (of any market cap). In fact, let's peak at that list, below.



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There's a very strong bullish thesis for the company and it goes something like this: revenue (TTM) is rising and trending higher (at least five consecutive quarters up). Net income (TTM) is rising and "trending" higher. free cash flow is rising and all the while, the firm is expanding with new warehouses as capital expenditures increase. We have a firm that is growing in all areas and even as it incurs large expenses to grow, those expenses are not preventing earnings from breaking all-time highs. Further, the company generates more revenue per employee than any other peer in the $25 billion to $100 billion market cap range. Let's look at that chart below, with the companies equal spaced on the x-axis (ranked) and revenue per employee in millions on the y-axis.


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But, there's a bearish thesis for COST as well, though, and it goes like this: With about 475 US warehouse locations, the firm is looking to expand that number by 20 in 2015. That poses a risk of cannibalization, or at the very least, risk of opening stores in locations that up until now have not been at the top of the list. I do note that The Motley Fool reports that Wal-Mart (WMT) has 647 Sam's Club warehouses, so Costco's numbers aren't out of the ordinary. Of course, Wal-Mart (WMT) prides itself at saturating markets, so, ya know... Another bearish thesis for COST surrounds the reality that 75% of operating profit comes from membership fees which means the introduction of Amazon.com's (AMZN) Prime Pantry (a direct on-line competitor to Costco) and Google's (GOOGL) home delivery services could crush the company if memberships drop.

This bearish thesis has been reflected in the stock price of late. COST stock is down more than 6% in the last three-months. The question ultimately becomes, is the risk from the bearish thesis too great to invest, or are the powerful fundamentals (as of today) worth the risk.

Technicals   |   Support: 135.06   |   Resistance: 140.5   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

COST is hitting a technical breakdown right now. The stock has a one bull (lowest rated) technical rating because while it's trading above its 10-day moving average, it's down on e the day, trading below both the 50- and 200-day moving averages and the 10 day MA is below the 50 day MA ("swing death cross").


Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-10-14 $1.66 $26,407.3 M $26,194.0 M $26,101.0 M Provided by ZACKS


Let's look at the core elements that drive the company's fundamental rating.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 115,944 109,604 104,887

Operating Margin (QTR) 1.032 1.03 1.03 RISING

Net Income (TTM US$ Millions) 2,307 1,978 2,031

Levered Free Cash Flow (TTM US$ Millions) 1,747 1,382 1,459 RISING

Capital Expenditures (TTM US$ Millions) 2,155 2,130 1,959 RISING





Stock Returns and Chart

COST is down -8.3% over the last three months and down -4.2% over the last six months. The stock price is up +18.7% over the last year. it's almost impossible to ignore the recent stock drop in the chart below.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 115,944109,604104,887


Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case nine consecutive quarters). Each of those results have created new all-time highs. Revenue over the trailing twelve months (TTM) for COST is up 5.8% year-over-year. The two-year change shows a 10.5% rise. As of the most recent year, COST has generated $116 billion in sales. Let us remember that we are not talking about a growth technology firm here, we're talking about a massive retailer whose market cap level of ~$62 billion is actually only about half of it's total sales. For perspective, Wal-Mart (WMT) has nearly $500 billion in sales ($485 billion).

What do all these numbers mean?
COST's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 2,3071,9782,031


Net Income (after tax profit) over the trailing twelve months (TTM) for COST is up to $2.3 billion (an all-time high) up 16.6% year-over-year. If the firm can maintain that earnings growth pace, the bullish thesis roars above the bearish thesis in my opinion. But, there's nothing guaranteed about that growth rate. Further, net income (TTM) is trending higher meaning that annual earnings have increased for at least five consecutive quarters.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars. The up-trend is easy to see.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Capital Expenditures (TTM US$ Millions) 2,1552,1301,959RISING


Capital Expenditures (CapEx) (TTM US$ Millions) in the most recent period for COST was $2.155 billion, just below its all-time high of 2.169 billion. CapEx is up 1.2% year-over-year but 10% over the last two-years. CapEx comes from the opening of new stores (amongst other things).

In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars. Note the rising bars from one-year ago.


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Tale of the Tape


In our final visualization, we take a look at several critical fundamental measures (many of which we have examined above), comparing COST to WMT.


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This is a fascinating visual. Let's take it row by row. Across the top we can see the WMT revenue towers above COST as does its net income. But, the final bar chart to the upper right shows us that COST generates massively higher revenue per employee than Wal-Mart ($734,000 vs $221,000).

Row two shows us that WMT has both higher gross margins and net income margins. That's one that not many people know.

The final image paints perhaps the most important picture. Revenue is growing faster for COST, earnings are growing much faster but in the final chart in the bottom right hand side we see that the price to sale is about the same for each company. More on that in the conclusion.

Summary
Costco has the second highest fundamental strength of any company of any market cap in its sector. But, the future growth depends heavily on both side-stepping competition from other huge players that live in the technology world, and building new warehouses in locations that up until now have been "not chosen."

If you believe in the growth of the company, then the price to sales ratio that is approximately equal to Wal-mart (WMT) might feel low and the stock could appreciate. If you believe in the bearish thesis (or non-bullish thesis), then the company's stock could still yet find trouble. If you're torn in between the two, keep this in mind: Up to this point, COST and its management have simply crushed it. Until that trend breaks, perhaps that's your tie breaker.