Costco Stock: A Buy as Analysts Continue to Get It Wrong (NASDAQ: COST)

Iryna Tolmachova/iStock Editorial via Getty Images

Sometimes great investments can be simple. Well, many of the best performing stocks over the past 20 years have been large-cap tech stocks with complicated business models. However, the best performing stock lists have also included traditional stocks companies such as Costco Wholesale Corporation (NASDAQ: COST).

Costco is one of the best managed companies in the United States. This retail giant has significantly outperformed the S&P 500 (SPY) and most retail stocks for some time.

Data by Y-Charts

Costco’s stock has been one of the best performing stocks in the market for some time, and the stock has Continued than doubled in the last 3 years alone.

Company presentation

Costco is a big-box retailer that sells almost everything. The company sells sporting goods, food, electronics, furniture, jewelry, small appliances and many other products. Costco even has a food court in many stores. Membership fees are only $60 per year, and the members consist nearly 75% of Costco’s overall sales.

Costco stores often feature gas stations that offer cheap gas to Costco member customers, and the company has also Is basic car maintenance work such as changing tires. The company has 636 gas stations, most of which are right next to stores, and Costco frequently offers gas prices around 15% below market prices. Costco operates internationally, but the company East primarily an American company, with 564 of the 815 member warehouses in the United States

Costco is one of the best-run big-box retailers in the United States, and the company is taking advantage of high gas prices and rising consumer prices in several ways. Stores are focusing on offering value and larger portions, and as prices have risen, stores such as Costco have been more appealing to value shoppers. Costco also requires people who want to take advantage of the company’s cheap gas to become Costco members, and high gas prices have also led to increased membership and stronger overall sales.

Recent Earnings Reports

Costco’s first and second quarter earnings reports for 2022 compare favorably to the company’s sales in 2021, and the reports also show the company’s strong momentum. Costco reported first-quarter results showing year-over-year sales increased 16.7% as store traffic increased 6.8% internationally and 5.9% in the United States. grown up 9.9% on an annual basis.

The company also has added 836,000 new executive members, bringing the number of executive members to 26.5 million. This is very important, since 70% of the company’s employees Sales are to the executive members. The average ticket per customer excluding gas sales was at the top 2.5% worldwide and 3.5% in the United States.

Even more impressive are the company’s margins, which have constantly evolved higher over the past 12 years has also held up well. Costco’s net margins have moved from 1.5% to 2.5% over the past decade, and the company still sees higher margins than 2 years ago, with net margins consistently at 2.54%. This number is right at the high end of the range in which this company has recorded margins over the past 12 years. Although, as expected, gross margins fell by 49 basis points on an annual basis, gross margins fell of only 6 basis points excluding gas inflation.

The results of the company in the second quarter report showed that the same positive trends of the first quarter also continue. Costco reported comparable store sales growth of 11% year-over-year in the second quarter, membership fee revenue up 9.7% year on year and revenue up 16 % on an annual basis. There has been no significant margin compression despite the inflationary environment in the US and globally.

The company also saw online sales moderate to 13% of total sales, from 75% of sales a year ago. This drop in online sales is good because the company has much higher margins and bigger tickets when consumers come to the store. The company’s retail gas business obviously also benefits from consumers coming to the stores.

A Summary of Costco Fundamentals

Costco took significant market share from competitors without having to lower prices and promotions that would hurt the company’s margins. The only margin squeeze that Costco has seen comes from gas sales, but high gas prices have been a major reason Costco has been able to increase memberships and sales.

It is very difficult to predict commodity prices, but gas prices are expected remain high for much of the year as President Biden refuses to promote new drilling domestically, and geopolitical events such as the recent Russian invasion of Ukraine are also pushing prices higher. Since membership is required for consumers to take advantage of Costco’s cheap gas prices, and Costco is also focused on providing consumers with value for money, the company should be able to continue to grow membership and gain market share in the current inflationary environment.

Costco is an exceptionally well-run company, and the company’s employees are very well trained and supported. Costco recently paid out a special dividend to 401k employees, and the company also increased salaries for existing employees. The average Costco worker makes $20 per hour, or nearly $41,000 per year, which is significantly more than competitors like Walmart pay employees. Walmart employees, for example, Craft on average around $31,000 per year.

Possible risks for investors

Still, all investments involve risk, and Costco has benefited greatly from the recent rise in gas prices and rising consumer prices across the board. If gasoline prices and consumer prices in general were to drop significantly in the near term, it is possible that Costco’s market share gains made over the past year could slow or reverse.

Costco’s growth rate has accelerated over the past year as the company has made significant market share gains, primarily due to higher gasoline prices and rising prices, two factors that have led customers to seek more additional value from outlet stores such as Costco. The stock has seen a strong rise over the past 3 years and the company is trading at a high growth multiple. A slowdown in the growth rate could lead to multiple contractions and sales from current levels.


Analysts have always been wrong about Costco, and the stock still looks undervalued. Although some analysts listing Costing 40x forward earnings estimates and 13x book value, the company has consistently and significantly exceeded analyst estimates. This is why most analyst price targets for this company have always been too low.

Costco has beaten earnings estimates in five of the past six quarters, and the company has beaten earnings forecast of $0.30 per share or more in three of the last four quarters. The company is expected to increase profits by 13% this year and 8% next year, but as same-store sales growth and market share gains will be strong, Costco should easily be able to boost profits. at a double-digit rate next year.

The company also has a very strong balance sheet, with more than $12 billion in cash and only $9 billion in debt. The company is generator nearly $10 billion in cash flow from operations, so management has the flexibility to increase dividend payouts and redemptions as well as pursue acquisitions. Costco is just starting to expand internationally as well, with almost 70% of the company’s stores are currently in the United States, so there are plenty of opportunities there.


Many of the best performing stocks over the past two decades have been large-cap, complex technology companies such as Apple (AAPL), but Costco’s stock has also been one of the best performing stocks in the market for over a decade now. Costco is one of the best managed companies in the world, and the company’s strong management team is benefiting from current market conditions. With consumer prices high and likely to remain so for some time, consumers are looking for discounts and Costco is taking significant market share from the company’s competitors. Analysts have always been wrong about Costco, and with a strong balance sheet and good growth prospects both at home and abroad, Costco should continue to outperform.

Comments are closed.