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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (44) 

Costco: Great Company, Great Investment

The retailer keeps customers and employees happy

November 22, 2020 | About:

Costco Wholesale Corp. (NASDAQ:COST) is a great company and a great investment.

It's a great company because it ranks highly on several high-profile company lists, like the American Customer Satisfaction list. Costco occupied the number one position back in 2018 in online customer satisfaction, ahead of Amazon (NASDAQ:AMZN).

That's why Costco has a strong following among consumers, who pay membership fees for the privilege to shop at its stores.

Meanwhile, Indeed.com places Costco on the top of the list of best places to work, making it easy for the wholesale retailer to attract a qualified labor force.

Companies that keep customers and employees happy usually make good investments. Happy customers help spread the word for the company's brand, while happy employees help the company provide the services that meet customer expectations, supporting and reinforcing the brand's buzz.

A positive buzz, in turn, helps companies grow and deliver superior financial performance. Costco grew from 592 warehouses back in 2011 to 789 by 2019, and managed to compete effectively against Target (NYSE:TGT), Walmart (NYSE:WMT) and Amazon.

Over the last three years, Costco's revenue grew by 8%, beating both Target's and Walmart's growth, maintaining the industry's highest economic profit.

Costco

Target

Walmart

Amazon

3-year Revenue Growth (%)

8.7

7.9

5.4

25.6

3-year EBITDA Growth (%)

8.7

4.2

3.6

42.2

Current Operating Margin (%)

3.26

5.87

3.93

5.72

Average Annual Total Return (2010-20)

20.10

14.63

13.71

34.75

Market Price

$382

$169.56

$150.4

$3,142.4

Intrinsic Value

$284.87

$103.67

$115.41

$2,835.4

Company

ROIC

WACC

ROIC-WACC (Economic profit)

Costco

12.81%

4.26%

8.55%

Target

12.59%

6.12%

6.47%

Walmart

8.73%

3.39%

5.34%

Amazon

11.37%

9.48%

1.89%

A superior financial performance, in turn, has helped Costco deliver superior returns on Wall Street. For the period between 2010 and 2020, Costco has delivered a 20.10% average annual total return, beating both Walmart's and Target's returns.

And the future looks bright for the company, as long as Costco continues to keep both customers and employees happy, reinforces the company brand and maintains its membership model.

That will allow the company to continue to cater to more affluent customers and bring in a steady stream of subscription revenue--something Wall Street has been paying a great deal of attention to in Costco's quarterly financial reports, thus far.

In short, Costco's case confirms that great companies make good investments.

Disclosure: I own shares of Costco and Amazon.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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