Costco Wholesale Corp (COST, Financial) saw a daily loss of 3.84% and a 3-month gain of 2.81%, with an Earnings Per Share (EPS) of 14.16. The question at hand is whether the stock is fairly valued. This article provides an in-depth valuation analysis, shedding light on the intrinsic value of Costco Wholesale.
Introduction to Costco Wholesale
Costco Wholesale operates a membership-based, no-frills retail model, offering a select product assortment in bulk quantities at bargain prices. With a frugal cost structure, the firm prices its merchandise below competing retailers, driving high sales volume per warehouse and generating strong profits on thin margins. Costco operates 591 warehouses in the United States and has over 60% market share in the domestic warehouse club industry. Internationally, the company operates another 270 warehouses, primarily in markets such as Canada, Mexico, Japan, and the U.K.
Currently, Costco Wholesale's stock price stands at $547.67, with a market cap of $242.50 billion. The GF Value, an estimate of the fair value, is $551.84, suggesting that the stock is fairly valued. The following analysis provides a deep dive into the company's value, combining financial assessment with essential company details.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is based on three factors: historical multiples at which the stock has traded, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance. The GF Value Line on our summary page provides an overview of the fair value at which the stock should be traded.
The stock of Costco Wholesale appears to be fairly valued, according to GuruFocus Value calculation. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. As Costco Wholesale is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength of Costco Wholesale
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before purchasing shares. Both the cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. Costco Wholesale has a cash-to-debt ratio of 1.72, which ranks better than 75.41% of 305 companies in the Retail - Defensive industry. The overall financial strength of Costco Wholesale is 8 out of 10, which indicates that the financial strength of Costco Wholesale is strong.
Costco Wholesale's Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Costco Wholesale has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $242.30 billion and Earnings Per Share (EPS) of $14.16. Its operating margin of 3.35% is better than 52.09% of 311 companies in the Retail - Defensive industry. Overall, GuruFocus ranks Costco Wholesale's profitability as strong.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Costco Wholesale's 3-year average revenue growth rate is better than 75.35% of 288 companies in the Retail - Defensive industry. Costco Wholesale's 3-year average EBITDA growth rate is 14.3%, which ranks better than 63.81% of 257 companies in the Retail - Defensive industry.
Return on Invested Capital vs Weighted Average Cost of Capital
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Costco Wholesale's return on invested capital is 14.62, and its cost of capital is 10.35.
Conclusion
In conclusion, the stock of Costco Wholesale appears to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 63.81% of 257 companies in the Retail - Defensive industry. To learn more about Costco Wholesale stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
