Costco Is Better Than Competitors

In this article, let's take a look at Costco Wholesale Corporation (COST, Financial), a $65.27 billion market cap company, which operates about 650 membership warehouses in the U.S., and other countries such as Puerto Rico, Canada, the U.K., Taiwan, Japan, Korea, Mexico and Australia.

Business Model

The company operates about 650 warehouses (95 million square feet) worldwide, far behind from Wal-Mart's (WMT, Financial) network of about 11,000 locations and 1.1 billion square feet.

Due to its business model, two effects characterized the firm. First, margins are low, and second productivity is high for its rapid inventory turnover with important volumes of sales. It generates about $100 billion in net sales. These things combined with cost advantage supports a brand intangible asset.

Growth Potential

The company is well positioned to benefit from its product mix as well as operations in some areas. Promising countries like the U.K., Taiwan, Korea, and Australia, make me believe the firm would have an attractive global growth potential.

Revenues, Margins and Profitability

Looking at profitability, revenue rose by 4.36% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.35 vs $1.05). During the past fiscal year, the company increased its bottom line. It earned $4.66 versus $4.63 in the previous year. This year, Wall Street expects an improvement in earnings ($5.19 versus $4.66).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 19.45% which is higher than the one exhibited by G Willi-Food International (WILC, Financial), Cencosud (CNCO, Financial) and Companhia Brasileira De Distribuicao (CBD, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 30.6x, trading at a premium compared to an average of 24.9x for the industry. To use another metric, its price-to-book ratio of 6.50x indicates a premium versus the industry average of 2.49x while the price-to-sales ratio of 0.57x is above the industry average of 0.55x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $28,913, which represents a 23.7% compound annual growth rate (CAGR).

http://www.gurufocus.com/chart/COST#&serie=,,id:per_share_eps,s:COST"> src="http://chart.gurufocus.com/1426084887786.png" />

The stock has surged by almost 30% over the past year.

Final Comment

As outlined in the article, the turnover inventory strategy, combined with operating efficiencies and costs reductions, the self-service warehouse facility and the cash generated from membership fees, make Costco a profitable company and we still believe is even better than traditional retailers and other competitors. These reasons make me feel bullish on this stock.

Hedge fund gurus like Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Jim Simons (Trades, Portfolio), Bill Frels (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) have added this stock to their portfolios in the fourth quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned