Buy, Sell, or Hold Costco?

Costco (Nasdaq: COST  ) has proven its worth in 2011, that's for sure. Not only has it shamed rivals such as Wal-Mart (NYSE: WMT  ) with incredible sales increases, its shares have been on the upswing, too, having risen about 16% in the past year. Still, some investors may be wondering whether they should buy, sell, or hold Costco while the going's still good.

For some idea of the bulky business Costco has been running, let's compare some financial metrics to some discount retail peers.

Company

LTM Revenue Increase (decrease) %

Earnings (loss) Per Share

Gross Profit Margin %

Total Debt-to-Capital Ratio

Costco 14.3% $3.32 12.5% 15.4%
Big Lots (NYSE: BIG  ) 3.2% $2.82 40.0% 27.5%
Wal-Mart 5.0% $4.44 25.0% 45.3%
Target (NYSE: TGT  ) 3.5% $4.30 29.9% 55.5%

Source: S&P Capital IQ; trailing 12 months.

Costco's 14.3% top-line growth is a comfort for stock holders. Growing sales has been a major sticking point for discount giant Wal-Mart in 2011, yet Costco has managed to keep its loyal customers coming back for more as shown by such an impressive level of sales growth.

In the fiscal year ended August 2011, Costco grew same-store sales by 7%, too, then followed up with a 10% surge in July. Costco isn't showing signs of stopping, either; November same-store sales surged 9%, blowing past analysts' predicted 6.5% increase.

Costco has even managed to implement a hike in membership fees this past year. Given the warehouse retailer's 7.5% increase in membership fee revenue last quarter, it's clearly bested 2011 disgrace case Netflix (Nasdaq: NFLX  ) at implementing a price increase its bargain-hunting members are willing to pay these days. (Granted, Costco's super-low profit margin helps illustrate just what kind of bargains it passes along to its paying members.)

I can imagine many investors might be leaning toward a sell, but don't be hasty. Not only do I believe Costco is a solid hold, I believe it's reasonable to buy the stock now. Granted, Costco's forward price-to-earnings ratio of 25 looks super expensive compared to Wal-Mart, Target, and Big Lots (which trade at forward multiples of 13, 12, and 14, respectively). However, Costco's the one that's pulling off an exceptional feat in the current economic environment: generating double-digit percentage sales growth.

Costco's retiring CEO, Jim Sinegal, has made it clear his goal has been to build a great business for the long haul. Maybe lots of investors think Costco's 2011 victory is a great time to sell, but here's a thought for 2012: Selling exemplary businesses in uncertain economic times is a bigger mistake than ever.

If you haven't already, click the link to add Costco Wholesale to your watchlist to follow the warehouse retailer's performance in 2012, or download the free report "The Motley Fool's Top Stock for 2012," which highlights a company Motley Fool analysts have dubbed a Latin America version of Costco.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Costco Wholesale and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Costco Wholesale, and Netflix. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2011, at 2:52 AM, puula wrote:

    Costco rocks. I hope Sinegal's business plan stays intact after his departure.

Add your comment.

DocumentId: 1749911, ~/Articles/ArticleHandler.aspx, 4/16/2014 6:59:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement