Hot dogs at Costco (NASDAQ: COST) are obviously cheap, but the stock itself does not appear obviously cheap. With the shares trading at 44 times forward earnings, investors may wonder if the valuation has gotten ahead of itself. That said, with a fair stock price less than $600 per share, a stock split could be on the horizon. In this article, I discuss the history of the company with stock splits, the likelihood of a future stock split, and valuation as it stands today.
COST Stock price
Although COST is not a technology stock, it has generated similar returns to technology over the past few years.
Trading at around $575 per share, the stock is at all-time highs despite all the current volatility. Although COST significantly increased its bottom line during this period, multiple expansion generated a good portion of the returns.
COST Key Action Metrics
Today, COST has a customer list covering over 63.4 million households and 114.8 million total cardholders. The 92% renewal rate despite membership fees underscores the company’s perceived value.
During the last quarter, COST maintained strong sales growth of 16% and increased its net profit by 37%. Same-store sales of 14.4% were impressive, especially as the company outperformed tough pandemic-related comparables.
COST ended the quarter with $5.6 billion in net cash. I expect COST to maintain its net leverage over the long term. The current balance sheet position is an important long-term driver of shareholder value.
How many times has Costco stock been split before?
COST has split its shares three times before – in 2000, 1992 and 1992, as shown below.
When it split its stock in 2000, the shares were trading at around $100 per share. When it split its stock in 1992, the shares were trading at around $50 per share. When it split its stock in 1991, the stock was trading at around $60 per share.
Is Costco likely to split its stock again?
Now that the shares are trading near $600 per share, it seems plausible to expect a stock split at some point. The company split its shares at much lower prices, and with the earnings multiple not clearly cheap, management might view a stock split as an effective way to continue to generate shareholder value, even if it doesn’t change anything directly on a fundamental basis.
What is the future of Costco stocks?
Looking ahead, Wall Street expects COST to maintain high single-digit revenue growth over the next decade.
Consensus earnings estimates seem far too low. While analysts expect COST to grow revenue by 86% through 2031, analysts only expect earnings growth of 133% over the same period.
COST’s business model is one that inherently has a lot of operating leverage, and so I expect profits to grow much faster than revenue in the future. It should be noted that earnings growth more than doubled revenue growth in the last quarter. In 2021, COST increased revenues by 17.7% and profits by 25%.
Is the COST action a buy, sell or hold?
Operating leverage is fundamental to the bullish COST thesis and explains why I still own the stock despite the 44x multiple of forward earnings. Below we can see an overview of the income statement.
While COST generated $195.9 billion in total sales in 2021, it only generated $5 billion in net income. Contributions totaled $3.9 billion, making up the vast majority of net income. Historically, membership fees have generated most, if not all, of the net income, leading investors to believe that the company’s strategy is to make money only from membership fees. . In my opinion, this underestimates the company’s ability to generate operating leverage. Of course, the company used an aggressive pricing system to continue taking retail market share. Still, there’s no reason the company can’t increase its margins so slightly. Since COST’s current operating margins are so low, very small increases in gross margins could result in dramatic increases in net income. I note that the 11.1% gross margin posted in 2021 is much higher than the 10% gross margin posted in 2012. I guess COST can easily drive an additional 1% gross margin expansion. This could happen through a combination of price increases for customers and suppliers. 100 basis points of gross margin expansion would have led to an additional $1.9 billion in gross profit and increased net income by nearly 40% in 2021. The stock would trade at just over 31 times the profits using this adjustment for long-term earnings capacity. Based on consensus estimates, COST is expected to generate a net margin of 3.3% by 2031, slightly higher than the net margin of 2.6% posted in 2021. Assuming COST continues its practice of increasing $5 membership fee every 5 years, the company could increase fees by at least 20% over the next decade (there should be 2 or 3 fee increases over this period), this which could already lead to an increase in net margins to 3.0%. While COST is trading at 18.9x consensus earnings estimates for 2031, the stock is trading at just 13.5x that year’s earnings capacity (using the above projected gross margin expansion of 100 basis points). I could see the stock trading up to 40 times its earnings capacity by 2031, suggesting just under 200% upside over nine years. That’s a compound annual return of 12.8% – well below the typical stock I buy these days. That said, I see a high likelihood that COST will outperform consensus estimates, and the robust business model is one in which the stock can deliver a combination of low volatility and strong returns – giving it a place in most portfolios. , even at these valuations. The main risks of this thesis include competition from Walmart (WMT) and Amazon (AMZN). While consumers seem generally happy with their Costco shopping experience, it’s unclear if the company can retain market share if competitors offer cheaper prices and/or if online marketplaces offer more. convenience. The clearest indication of a break in fundamental thesis would be seen in weak comparable store sales. I rate stocks as a buy, especially looking for a source of safety in today’s volatile market.