I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit that some growth stories are bogus -- hence this regular series.
Next up: Costco (Nasdaq: COST ) . Is this discount retailer the real thing? Let's get right to the numbers.
|CAPS stars (out of 5)||*****|
|Bullish pitches||626 out of 661|
|Highest rated peers||PriceSmart, BJ's Wholesale (NYSE: BJ ) , Wal-Mart Stores (NYSE: WMT )|
Data current as of Nov. 27.
As a father of three, I can tell you that Costco is a divine gift. We shop there at least monthly, and often more than that, in order to get the big-box items needed to feed a family of five on the cheap. And I'm hardly alone.
Unfortunately, Costco isn't the only place where you can get a lot for a little. A lot of our friends would describe Wal-Mart the same way, arguing that the two are virtually indistinguishable.
I'm not so sure about that, but I'm also not sure it matters. Clearly, the market has room for more than one big-box retailer. Wal-Mart has grown revenue by 6.5% annually over the past five years. Costco's revenue has risen 8% annually over the same period.
So why invest in Costco? Demographics. Whereas Wal-Mart caters to a lower-income population, Costco attracts large corporate clients.
"Who doesn't love Costco?" wrote Foolish investor DigitalPaladine earlier this month. "I spend more money in that store than any other establishment. Excellent products. Excellent service. Excellent prices. Great business model. Lots of corporate customers. Highly brandable, excellent reputation."
The elements of growth
Last 12 Months
|Normalized net income growth||16.2%||(12.7%)||9.5%|
|Shares outstanding||433.5 million||436 million||425.8 million|
Source: Capital IQ, a division of Standard & Poor's.
The numbers in this table support our Fool's conviction. Let's review:
- Gross margin impresses me most. Think about the subtext here. Even as the rest of the retail sector was taking a beating during the recession, Costco developed a more profitable product mix. Impressive.
- Revenue and profit have grown inconsistently since 2008, but this is to be expected in retail. Economic ebb and flow is inevitable.
- I'm also encouraged to see receivables growing more slowly than revenue over the trailing 12 months. Inventory growth also trailed revenue growth, just as it did during 2008. Call it a byproduct of careful expense management, which also explains why Costco has achieved double-digit returns on capital for most of its history.
Competitor and peer checkup
Normalized Net Income Growth (3 yrs.)
|Amazon.com (Nasdaq: AMZN )||40.6%|
|Target (NYSE: TGT )||(3.3%)|
Source: Capital IQ. Data current as of Nov. 27.
Amazon is the growth leader in normalized net income, but that may owe more to the inherent efficiency of its business than any deficiency on the part of its big-box peers. BJ's Wholesale looks interesting, but lacks Costco's scale and cash-generating ability.
Costco's free cash flow really shines. The stock trades for 23 times trailing earnings, but 19 times the retailer's ample cash flow. Not that it maters. Either multiple is justifiable, given the company's history of excellent management. That's why I've rated the stock to outperform in my CAPS portfolio.
Now it's your turn to weigh in. Do you like Costco Wholesale at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.
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