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.

Foolish facts



CAPS stars (out of 5) *****
Total ratings 3,996
Percent bulls 96.4%
Percent bears 3.6%
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%
Revenue growth 9.1% (1.5%) 12.5%
Gross margin 12.8% 12.7% 12.4%
Receivables growth 4.3% 12.9% 19.6%
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%
BJ's Wholesale 11.9%
Costco Wholesale 3.6%
Target (NYSE: TGT) (3.3%)
Wal-Mart Stores 5.4%

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.

Grade: Sustainable
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.

Interested in more info on Costco? Add it to your watchlist.

Costco and Wal-Mart are Motley Fool Inside Value picks. Wal-Mart is also a Motley Fool Global Gains recommendation. Amazon and Costco are Motley Fool Stock Advisor selections. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 owns shares of Costco and Wal-Mart. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.