Many investors have increased their positions in Costco Wholesale Corp. (COST, Financial) instead of other wholesale companies like Amazon.com Inc. (AMZN, Financial). Several likely reasons include higher operating margins, less volatile ROE and enterprise multiples and steady year-over-year EPS growth.
Firms with higher operating margins are usually more profitable than firms with low operating margins. Costco’s operating margin is higher than 53% of companies in its industry while Amazon’s operating margin is lower than 55% of companies in the global specialty retail business. The charts below summarize the five-year and the 10-year operating margin of these two companies.
Based on the above two charts, Costco experienced near-steady operating margins in the past 10 years, averaging about 3.1% during the 10-year time period. On the other hand, Amazon’s operating margins are more volatile, ranging from as high as 5% in early 2006 to almost 0% around New Year’s Day 2015. Furthermore, Amazon experienced decreasing operating margins during the past 10 years: In the second half of 2011, Amazon’s operating margin fell below Costco’s and continued decreasing during the subsequent four years.
Stocks that have higher return on equity (ROE) more likely present profitable opportunities for gurus. The above chart shows the five-year ROE of Costco and Amazon. According to the chart below, Costco’s ROE steadily increased throughout the past five years. Amazon’s ROE, on the other hand, sharply declined during 2011-2013 and reached a trough of -2.35% near the end of 2014. Since mid-2011, Amazon’s ROE is very low compared to Costco’s ROE. Furthermore, Costco’s ROE is higher than 88% of stocks in the global discount stores industry while Amazon’s ROE is higher than just 60% of stocks in its industry.
The above graph shows the year-over-year EPS growth for the past five years. Based on this graph, Costco had steady EPS growth in the past five years while Amazon’s EPS growth fluctuated sharply. Amazon’s EPS increased over 755% from 2013 to 2014 but then decreased 188% in the next year. Furthermore, Costco’s three-year EPS growth is higher than 64% of companies in the global discount stores industry.
Costco’s EV/EBITDA multiples have remained about 14.8% for the past five years, according to the chart below. On the other hand, Amazon’s enterprise multiples, which are higher than Costco’s, fluctuated between 30% and 50% during this time period. Firms with high and volatile enterprise multiples are generally less profitable than firms with low and steady enterprise multiples.
As the financials for Costco outperform those of Amazon, many investors increased their positions in Costco. Costco’s stock closed at $149.7 per share Thursday, about a $7 increase from May 23.
See also: Competitive Comparison: COST and AMZN
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