Costco Wholesale Corp (COST, Financial) has experienced a notable daily gain of 4.45%, alongside an impressive 3-month gain of 18.63%. With an Earnings Per Share (EPS) of 14.16, investors are keen to understand whether the stock is modestly overvalued. The following valuation analysis aims to shed light on this question, urging readers to delve into the financial intricacies that define Costco Wholesale's current market position.
Company Introduction
Costco Wholesale Corp operates a streamlined, membership-based retail model, focusing on selling bulk quantities at low prices. This approach, coupled with a minimalistic cost structure, enables Costco to undercut competitors and achieve high sales volumes. With a commanding 60% market share in the U.S. warehouse club industry and a significant international presence, Costco's financial health is a pivotal aspect for investors. When comparing the stock price of $658.82 to the GF Value of $555.17, a measure of intrinsic value, it appears that Costco may be modestly overvalued.
Summarize GF Value
The GF Value is a unique metric that represents the intrinsic value of a stock, incorporating historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line serves as a benchmark for what is considered a fair trading value for the stock. If the price of Costco Wholesale (COST, Financial) is significantly above this line, the stock may be overvalued, potentially leading to a lower future return. Conversely, a price below the GF Value Line could indicate a higher future return. With a market cap of $292.40 billion, Costco Wholesale (COST) seems to be modestly overvalued, which may affect its long-term stock performance despite strong business growth.
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Financial Strength
Investing in companies with robust financial strength is critical to avoid permanent capital loss. Costco Wholesale's cash-to-debt ratio of 1.72 ranks well within the Retail - Defensive industry, placing it in a strong financial position. GuruFocus rates Costco's financial strength as 8 out of 10, indicating a solid balance sheet.
Profitability and Growth
Consistent profitability is a key indicator of a company's investment risk level. Costco Wholesale has maintained profitability for the past decade, boasting an operating margin of 3.35%, which ranks competitively within its industry. With a revenue of $242.30 billion and an Earnings Per Share (EPS) of $14.16, Costco's profitability is ranked 9 out of 10. Regarding growth, the company's 3-year average annual revenue growth of 13.2% outperforms a significant portion of its industry peers, suggesting a strong capacity for value creation.
Return on Invested Capital vs. Weighted Average Cost of Capital
An examination of Return on Invested Capital (ROIC) in relation to Weighted Average Cost of Capital (WACC) provides insight into Costco's profitability. Ideally, a company's ROIC should exceed its WACC. Costco's ROIC of 14.62 indicates effective cash flow generation relative to its invested capital, surpassing its WACC of 9.63, which is a positive sign for investors.
Conclusion
In conclusion, while Costco Wholesale (COST, Financial) appears to be modestly overvalued, its financial condition and profitability remain strong. The company's growth outpaces many competitors in the Retail - Defensive industry. For a more detailed financial analysis, investors can explore Costco Wholesale's 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.
