Costco Wholesale (COST 0.46%) is a company you may know well. Chances are, you or someone you know shops there, taking advantage of great bargains on everything from food to electronics and even gasoline. The warehouse has delivered a shopping win to customers year after year, allowing them to save money on just about everything they need to keep their households running.
And, as a publicly traded company, Costco also has scored a win for investors over the years. This is by growing revenue and profit, and that has translated into the stock price taking off -- it's climbed almost 150% over the past five years. But don't worry, even though Costco stock has advanced, it's not too late to get in on this growth story. In fact, here are three reasons to buy Costco stock like there's no tomorrow.
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1. A strong profit driver
Costco sells a vast range of items at rock-bottom prices -- from the $1.50 hot dog to $4.99 rotisserie chicken -- so you might wonder how it possibly generates a profit. Well, the company actually doesn't rely on sales of products in its warehouses to generate huge profits. Instead, what drives profitability are membership fees, from the standard membership at $65 annually to the executive one at $130.
This means Costco starts making money as soon as you sign up for a membership -- and that's before you even set foot in the warehouse and fill up your cart. Its earnings reports illustrate this. For example, in the recent quarter, membership fees totaled more than $1.7 billion and net income equaled $2.6 billion.
What makes this particularly positive is the fact that Costco's membership renewals have surpassed 90% quarter after quarter in the U.S. and Canada, its biggest markets. All of this is great because it offers investors visibility on future profit -- and by not relying on sales of goods for earnings growth, the company has more wiggle room when it comes to pricing.
2. Ability to manage import tariffs
Speaking of pricing, investors might worry about retailers -- including Costco -- as President Donald Trump implements his import tariffs. But the good news for Costco shareholders is this warehouse giant has the ability to manage such duties.
There are a few reasons for this. First, Costco works with a wide network of merchants worldwide so it's able to favor certain ones located in countries with lower tariffs, for example. Second, since, as mentioned above, Costco doesn't have to secure huge margins on goods sold, it has more room to work on prices without hurting profitability.
And another point is Costco's private label, Kirkland Signature, which offers it more flexibility on sourcing and sales. Costco recently said it was looking into sourcing more for Kirkland in the countries where those products would be sold.
All of this allows Costco to be nimble when faced with tariffs -- and should result in limited impact on growth.
3. A reasonable price (at least for now)
Finally, an excellent reason to buy Costco right now has to do with the stock's valuation. It's not dirt cheap -- and it hasn't been in recent years -- but valuation has declined from highs earlier this year.
It's important to note that Costco may be more expensive than many other retailers, but the points I mentioned above make it worth the premium. And today, trading at 46 times forward earnings estimates, down from more than 56, the stock price looks very reasonable.
Of course, the stock may not stay at this valuation and could head higher if Costco, in upcoming earnings reports, shows that it indeed is able to manage tariff headwinds. At that point, investors might flock to the stock as a tariff safe haven. But even if Costco doesn't take off immediately, today's price still represents a solid entry point for a company that's proven its earnings strength and has what it takes to excel -- and deliver a win for investors -- over the long term.
