Throughout the past few years, Costco Wholesale (COST, Financial) has performed impressively. However, the stock has been range bound for approximately two years now. This may be due to the fact that the company’s earnings were catching up to its valuation, as investors had bid up the stock too high towards the end of 2014.
Although with a trailing price-earnings (P/E) of 28, Costco isn’t cheap, but the stock can break past its range barrier now that it is priced more reasonably and is still growing at a decent pace.
In the most recent quarter, the company reported earnings per share of $1.77, surpassing the estimates by four cents. On the other hand, the company’s revenue came in at $35.73 billion, missing the estimates by $1.08 billion. Despite missing the estimates, that figure still represents a surge of 2.1% year-over-year.
Although that figure looks feeble, it is a great thing for the company to report a surge in revenue considering the escalating belligerent competition from other companies in the space. As compared to foremost rival Target (TGT, Financial), Costco accounts for the fastest growing company.
Throughout the past five years, the company’s EPS and revenue are increasing at a yearly average rate of 10% and 6%, respectively. Moreover, the company’s outlook for bottom-line growth over the long run is more justifiable compared to Target’s.
Costco has the ability to work on very small profit margins, due to the extraordinary loyalty rates of its consumers and its proficiency at selling wholesale goods at unrivaled scale. This possibly offers the company a superior competitive lead in contrast to the rise of e-commerce.
On the other hand, the company’s most significant engine of profit, membership fees, surged by 6%. Due to this, Costco’s net income escalated 2% to $779 million. Moreover, Costco’s management detailed that the fee results were driven by membership growth as it opened 10 new warehouses.
Most significantly, the executive membership segment now accounts for approximately one-third of the membership base, a surge of 25% compared to a decade ago. Moving onward, the company’s goal is to increase that figure more than 50%.
Costco’s belligerent store extension rate should keep membership numbers ascending higher. The company inaugurated 29 stores in 2015 and plans to do the same this year. Thus, the company’s growth rate should remain robust this year, which is why I think the stock is reasonably priced and ready to break out of the range barrier.
Summing up
Costco has several growth plans that will allow the company to grow into its current valuation, and then some. The aforementioned initiatives will help the company break out of its range barrier, which is why I am bullish on the stock.
Disclosure: No position in any of the stocks.
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