Costco After the Recent Correction-Overvalued Or Undervalued?


This is the fourth in a series of articles where I will cover popular and/or high profile stocks. The primary objective of this series will be to put a spotlight on the importance of forecasting future growth prior to making an investment decision. I elaborated on the importance of forecasting future growth in part 1 of this series. The central idea is to determine whether or not a reasonable forecast of future growth warrants consideration for investment relative to how the market is currently valuing a given stock.

Furthermore, I believe it’s imperative for long-term success that investors apply their best efforts towards determining the intrinsic value of any stock they are interested in. This is especially true for long-term oriented investors. If you overpay for even a great business, you are very likely to be disappointed with your long-term results. Overvaluation is an obvious risk that can, and should, be avoided.

However, this principle is not cut and dry as it relates to Costco (COST) because this company has chronically commanded a premium valuation based on earnings. Consequently, prospective investors are faced with the challenge of being willing to pay a premium multiple of earnings to invest in Costco believing that this premium valuation will continue. On the other hand, as it relates to operating cash flows and/or EBIDTA, the market has consistently valued Costco more reasonably. Nevertheless, as the video associated with this article will clearly illustrate, Costco remains highly valued regardless of which metric you apply.

Costco Wholesale Corporation: Hypermarkets and Supercenters

Although I am sure that every reader is familiar with Costco and its stores, the following long business description provides additional granularity on the company and its business:

“Long business description: Courtesy S&P Capital IQ

Costco Wholesale Corporation, through its subsidiaries, engages in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, Taiwan, and Korea.

The company’s average warehouse space is approximately 144,000 square feet, with newer units slightly larger. Its warehouses on average operate on a 7-day, 70-hour week. Gasoline operations generally have extended hours.