COST Valuation Is Insane

Costco (COST) is an all time great stock and one of my personal favorite businesses because of the tremendous value it provides to consumers. COST is relentless in its quest to provide consumers with low prices. One measure of COST’s integrity to its mission is its extremely low margins. FY23 operating margins were 3.35%. That is, out of every dollar a consumer spends at COST, only a little more than 3 cents is operating income for COST – and they have to pay taxes on that 3 cents!

COST stock is beloved among investors as well because of its stellar long term performance. As a result, the stock perpetually trades at a high multiple. I finally bit the bullet and bought shares in December 2022 when COST dropped $60 in five sessions and breached $500. My intention was to hold for a very long time but the stock appreciated so much that I decided to take profits in December 2023 around $650. I didn’t think the multiple could continue to expand much more. I was wrong. COST closed Friday around $750 and now trades for 50x my FY24 EPS estimate of $15. That’s insane! Competitor Walmart’s multiple is half that (25x).

COST is a great business but it is not a growth stock. COST earned $14.16 in FY23, $13.14 in FY22 and $11.27 in FY21. While I expect earnings to continue to grow steadily, they are not growing fast enough to justify a 50x multiple. COST stock continues to go up because momentum and technical players are piling in. The price can no longer be justified on fundamentals.

COST reports 2QFY24 earnings Thursday afternoon.