Is The Earnings Miss An Opportunity To Buy Costco Stock Now?

  • Costco stock fell on lower earnings.
  • The miss was the result of low gas prices and the strong dollar.
  • Costco stock is still a buy if not a bargain.

Costco (NASDAQ:COST) stock plunged 5.4% on Wednesday after delivering quarterly numbers that disappointed analysts. 

The strong dollar and lower gasoline prices got most of the blame. When those were taken out same store sales were 6% higher than a year ago, but since those are reality revenues came in 1% below a year ago. The company reported earnings of $480 million, $1.09 fully diluted, on total revenue of $27.720 billion, against a profit of $496 million, $1.12 per share, and revenue of $26.866 billion a year ago.

Despite the “poor” results Costco said it would give shareholders a dividend of 40 cents per share, against 35.5 per share a year ago.

The “retreat” in earnings was duly reported, and duly misunderstood. Gas prices are down, so any retailer offering gas is bound to have lower revenue. But gas margins remain as they were, meaning profits margins are just as they were. It’s simple math. Similarly, currency effects are well-known. Any company that brings in profits from other countries is going to be throwing some of that money out the window as it comes in the door.

Still, Costco has been on a tear lately. Before reporting the earnings it was up 16% from where it was in August, before the fall in the market. I began accumulating Costco stock in 2013 as part of my retirement account, and now show a 32% profit, not including reinvested dividends.

The question, as always, remains just how far this model can go. It’s not designed for high-density cities, because the mass quantities being sold must be transported by car. Costco operates 487 warehouses in the U.S., a nation of about 300 million, and 210 elsewhere, 90 of them in Canada. How many more can it open while maintaining the high same store sale rate is always the question and Costco network expansion is deliberate – Atlanta, with 7 million people, currently has 7 stores, with one more rumored for 2016.

Costco, in short, remains an extremely well-run company, which avoids the cost of “breaking bulk” by simply not doing it, selling consumers wholesale quantities of most goods at discount store prices. The secret sauce, if there is one, is a perception of quality among its upper middle class customer base, and a class-less wage scale that does pay line workers well, but doesn’t pay store managers a whole lot more.

At its post-earnings “bargain” price, Costco stock is still going to cost you over 30 times its last years’ earnings. The market cap still represents $2 in equity for each $3 in sales, which is pretty high for a retailer – Walmart (NYSE:WMT) presently sells at less than $2 in equity for each $5 in sales. But Costco remains a cash flow machine, throwing off about $5 billion in free cash flow each year, and the debt-to-assets ratio is a reasonable 18%.

Costco stock is still a buy, but not a bargain.

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  • I do not have any business relationship with the companies mentioned in this post.
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