2024-06-20 11:35:20 ET
Summary
- Despite high valuation metrics, Costco remains a strong buy due to their unique business model and ability to excel in the retail sector.
- Costco's membership program provides a powerful revenue stream, financial stability, and strong customer loyalty, contributing to their success and resilience.
- Costco's efficient capital utilization, strong return on equity, and consistent revenue growth justify their seemingly high valuation, making the stock (I believe) a compelling investment.
Investment Thesis
While some investors believe Costco ( COST ) is overvalued based on their forward price-to-earnings (P/E) and revenue metrics, especially for a retailer, I disagree. Looking at these metrics, Costco has a P/E Non-GAAP ((FWD)) ratio of 53.88 , significantly higher than the sector median of 17.11. However, despite this high valuation, I believe Costco remains a strong buy due to their business model and unique features that allow them to thwart off many of the issues we are seeing with current retailers. Costco's shares have been strong compounders over the years, delivering consistent returns to investors. I expect this to continue.
One example is their ability to create immediate value with each new store. For example, the daily revenue on average for a Costco location is $530,000 meaning that in 1 year, one location can generate roughly $193 million in revenue. This is incredible that a single warehouse can generate nearly $200 million in revenue annually. Underpinning all of this is the membership. It's powerful even in this higher inflation economy....
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For further details see:
Why Costco Excels In A Tough Environment