Costco (COST 1.01%) has a reputation for delivering excellent value to customers. Similarly, Costco's stock has delivered exceptional value to shareholders, up 62% in the last year and 548% in the previous decade, before dividends.
It's understandable that potential investors would want to know more about this incredible retailer and whether or not the stock is a buy right now. There are scarce investors who would not be happy with the return Costco has delivered. Let's look at the business' prospects and valuation to determine if investors should buy Costco stock.
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Costco's excellent value proposition is evident from membership retention figures
Costco is a membership retailer with over 63.4 million paying members worldwide. That figure was up by 900,000 from the previous quarter. Consumers have grown to trust Costco's price leadership in the marketplace. Costco can offer great prices because it sells bulk sizes and carries fewer items. As a result, consumers show Costco loyalty, evidenced by its 89.6% membership retention rate globally.
In its fiscal second quarter ended Feb. 13, membership fee income rose to $967 million, up from $881 million for the same period the year before. Note that this revenue is nearly all profit, as there are few incremental costs associated with membership. For that reason, investors are looking forward to when Costco raises its membership fee. The company typically does so roughly every five years. The last increase came in June 2017, so the next boost could come in six to 12 months.
The expanding customer totals have undoubtedly helped sales increase from $99 billion in 2012 to $196 billion in 2021. Some retailers would use the grander scale to boost profit margins; not Costco. Its operating profit margin has stayed relatively flat between 2.8% and 3.4% in that same time. Meanwhile, Costco uses its considerable purchasing power to deliver even better value for consumers. For instance, members can buy a Costco hot dog and soda combo for $1.49.
The customer value proposition could gain more importance in the near term with consumers facing rising costs on everything from gas to groceries. As budgets get pinched, consumers will likely search for ways to get more bang for their buck and will find Costco the leader in that category.
Costco's stock has been expensive historically and comparatively
Costco, Target, and Walmart P/E ratio and P/FCF ratio data by YCharts
Costco's business prospects are excellent in the near and long term. That said, Costco's premium price is no secret to the market. When measuring by price-to-earnings and price-to-free cash flow, Costco's stock is selling at near its highest price in the last five years. What's more, Costco is trading at a substantial premium to its brick-and-mortar peers, Walmart and Target, according to the same metrics (see chart above).
Investors would be prudent to wait for Costco's stock price to pull back before starting a position. No doubt, the company has excellent prospects, but they are arguably already priced into the stock.
