October 12, 2014 NASDAQ: COST COSTCO WHOLESALE CORP BUY A+ A A- HOLD B+ B Annual Dividend Rate $1.42 B- C+ C Annual Dividend Yield 1.10% SELL C- D+ D D- Beta 0.52 E E- Market Capitalization $56.3 Billion Sector: Consumer Non-Discretionary COST BUSINESS DESCRIPTION Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. E+ Weekly Price: (US$) F BUY RATING SINCE TARGET PRICE 52-Week Range $109.50-$130.74 Sub-Industry: Hypermarkets & Super Centers SMA (50) SMA (100) 08/06/2009 $148.31 Price as of 10/9/2014 $128.41 Source: S&P 1 Year 2 Years 150 TARGET TARGET TARGETPRICE PRICE$148.31 $148.31 PRICE $148.31 TARGET 140 130 STOCK PERFORMANCE (%) 3 Mo. Price Change 8.89 1 Yr. 12.06 120 3 Yr (Ann) 17.57 110 GROWTH (%) Last Qtr 9.34 12.96 12.85 Revenues Net Income EPS RETURN ON EQUITY (%) COST Q4 2014 16.72 Q4 2013 18.82 Q4 2012 13.82 12 Mo. 7.11 0.93 0.64 3 Yr CAGR 8.20 12.07 12.08 100 90 Rating History BUY Ind Avg 16.98 20.00 17.97 S&P 500 14.28 13.75 13.93 Volume in Millions 30 20 10 2012 2013 0 2014 COMPUSTAT for Price and Volume, TheStreet Ratings, Inc. for Rating History P/E COMPARISON RECOMMENDATION We rate COSTCO WHOLESALE CORP (COST) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, largely solid financial position with reasonable debt levels by most measures and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows low profit margins. 27.56 22.00 18.70 COST Ind Avg S&P 500 HIGHLIGHTS The revenue growth came in higher than the industry average of 2.9%. Since the same quarter one year prior, revenues slightly increased by 9.3%. Growth in the company's revenue appears to have helped boost the earnings per share. EPS ANALYSIS¹ ($) 2012 2013 Q4 1.58 Q3 1.07 Q2 1.05 Q1 0.96 Q4 1.40 Q3 1.04 Q2 1.24 Q1 0.95 Q4 1.39 Q3 0.88 Q2 0.90 Q1 0.73 COSTCO WHOLESALE CORP has improved earnings per share by 12.9% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, COSTCO WHOLESALE CORP increased its bottom line by earning $4.66 versus $4.63 in the prior year. This year, the market expects an improvement in earnings ($5.15 versus $4.66). 2014 NA = not available NM = not meaningful 1 Compustat fiscal year convention is used for all fundamental data items. The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Food & Staples Retailing industry average. The net income increased by 13.0% when compared to the same quarter one year prior, going from $617.00 million to $697.00 million. The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels. The current debt-to-equity ratio, 0.41, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that COST's debt-to-equity ratio is low, the quick ratio, which is currently 0.59, displays a potential problem in covering short-term cash needs. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2014. All rights reserved. Report Date: October 12, 2014 PAGE 1 October 12, 2014 NASDAQ: COST COSTCO WHOLESALE CORP Sector: Consumer Non-Discretionary Hypermarkets & Super Centers Source: S&P Annual Dividend Rate $1.42 Annual Dividend Yield 1.10% PEER GROUP ANALYSIS 12.5% REVENUE GROWTH AND EBITDA MARGIN* WILC V FA AB OR CASY CVS CBD BSI UN -12.5% LE AB ANDE 3% 9% EBITDA Margin (TTM) Companies with higher EBITDA margins and revenue growth rates are outperforming companies with lower EBITDA margins and revenue growth rates. Companies for this scatter plot have a market capitalization between $86.7 Million and $94.9 Billion. Companies with NA or NM values do not appear. *EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization. 12.5% REVENUE GROWTH AND EARNINGS YIELD WILC V FA COST CVS KR CBD LE CASY INDUSTRY ANALYSIS Food and staples retailing is the second largest segment of the consumer staples industry and includes wholesale food distribution, grocery retaining, specialty food stores, and drugstores. Major players are Wal-Mart Stores (WMT), CVS Caremark (CVS), Walgreen Co (WAG), Sysco (SYY), Kroger (KR), Supervalu (SVU), Safeway (SWY), and Whole Foods Market (WFM), all of which possess unique operational models. The industry is defensive and characterized by stable growth. The Food and Drug Administration (FDA) is the regulatory body for food manufacturers and drug retailers. Regulation begins at the initial phases of development and continues through the manufacturing phase and down the supply chain. Law makers are considering legislation to prohibit Canadian pharmacies from selling prescription drugs to US mail-order customers in order to help domestic pharmacies. Prescription drugs account for approximately 10% of the total US medical bill. Also, Medicare favors generic drugs and in doing so influences industry participants. In the wake of our recent recession, consumer preference has shifted towards cost-effective choices such as discount groceries. Lifestyle drugs have been hit hardest. However, baby boomers are now propelling growth in the drugstore segment, which is expected to expand within the consumer staples industry. Increased pharmacy traffic is not necessarily a profit driver, but it triggers impulse purchase of general merchandise and services. The industry’s dependable revenue and low beta are commendable during an economic recession, but two factors will curtail long-run performance, rising raw material costs and high valuations. Food and staples retailing remains a stable business, but demand for food products is limited by the small annual US population growth. PEER GROUP: Food & Staples Retailing IMKTA BSI UN R VO FA LE AB -12.5% Price as of 10/9/2014 $128.41 AB OR PSMT Revenue Growth (TTM) 52-Week Range $109.50-$130.74 Demand for basic products remains stable regardless of economic conditions. Commodity pricing pressures are being offset by corporate restructurings, which are helping to maintain margins. During periods of weak growth, the industry tends to outperform. CNCO R VO FA Revenue Growth (TTM) IMKTA -15% Market Capitalization $56.3 Billion Food distributors maintain a specific product mix. Grocery stores are usually locally owned and have a fixed client base. They record average annual revenue of $14 million. Supermarkets rely on a distribution network to survive as they do not have enough space to store goods. Specialty stores use merchandising to attract foot traffic. Drugstores focus on prescription customers and sell over-the-counter (OTC) drugs, health and beauty aids, greeting cards, photo-finishing services, and general merchandise. LE KR Beta 0.52 CNCO ANDE 10% Earnings Yield (TTM) Companies that exhibit both a high earnings yield and high revenue growth are generally more attractive than companies with low revenue growth and low earnings yield. Companies for this scatter plot have revenue growth rates between -10.2% and 10.8%. Companies with NA or NM values do not appear. Ticker COST CVS WILC CNCO CBD IMKTA CASY KR PSMT BSI ANDE Company Name COSTCO WHOLESALE CORP CVS HEALTH CORP G WILLI-FOOD INTL LTD CENCOSUD SA CIA BRASILEIRA DE DISTRIB INGLES MARKETS INC CASEYS GENERAL STORES INC KROGER CO PRICESMART INC ALON BLUE SQUARE ISRAEL ANDERSONS INC Recent Price ($) 128.41 81.95 6.68 8.63 44.93 23.74 74.66 53.26 85.29 2.83 57.48 Market Cap ($M) 56,282 94,908 87 8,137 7,438 321 2,886 26,156 2,577 187 1,632 Price/ Earnings 27.56 20.04 10.77 15.69 20.90 10.94 22.15 17.41 NA NM 14.20 Net Sales TTM ($M) 112,640.00 132,053.00 99.28 19,203.14 26,042.57 3,820.00 8,016.69 103,963.00 2,494.51 3,389.67 5,081.02 Net Income TTM ($M) 2,058.00 4,892.00 8.08 529.74 550.30 49.38 131.09 1,569.00 71.03 -32.56 114.83 The peer group comparison is based on Major Hypermarkets & Super Centers companies of comparable size. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2014. All rights reserved. Report Date: October 12, 2014 PAGE 2 October 12, 2014 NASDAQ: COST COSTCO WHOLESALE CORP Sector: Consumer Non-Discretionary Hypermarkets & Super Centers Source: S&P Annual Dividend Rate $1.42 Annual Dividend Yield 1.10% COMPANY DESCRIPTION Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It offers candy, snack foods, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, office supplies, cameras, garden and patio, sporting goods, toys, seasonal items, and automotive supplies; dry and institutionally packaged foods; apparel, domestics, jewelry, house wares, media, home furnishings, and small appliances; and meat, bakery, deli, and produce. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, one-hour photo centers, and hearing aid centers; and travel businesses. In addition, it provides business and gold star (individual) membership services. As of March 6, 2014, it operated 649 warehouses, including 462 warehouses in the United States and Puerto Rico, 87 in Canada, 33 in Mexico, 25 in the United Kingdom, 18 in Japan, 10 in Taiwan, 9 in Korea, and 5 in Australia. Costco Wholesale Corporation also sells its products through online. The company was founded in 1976 and is based in Issaquah, Washington. COSTCO WHOLESALE CORP 999 Lake Drive Issaquah, WA 98027 USA Phone: 425-313-8100 http://www.costco.com Employees: 184000 Beta 0.52 Market Capitalization $56.3 Billion 52-Week Range $109.50-$130.74 Price as of 10/9/2014 $128.41 STOCK-AT-A-GLANCE Below is a summary of the major fundamental and technical factors we consider when determining our overall recommendation of COST shares. It is provided in order to give you a deeper understanding of our rating methodology as well as to paint a more complete picture of a stock's strengths and weaknesses. It is important to note, however, that these factors only tell part of the story. To gain an even more comprehensive understanding of our stance on the stock, these factors must be assessed in combination with the stock’s valuation. Please refer to our Valuation section on page 5 for further information. FACTOR SCORE 5.0 Growth out of 5 stars weak Measures the growth of both the company's income statement and cash flow. On this factor, COST has a growth score better than 90% of the stocks we rate. strong 4.5 Total Return out of 5 stars weak Measures the historical price movement of the stock. The stock performance of this company has beaten 80% of the companies we cover. strong 4.5 Efficiency out of 5 stars weak Measures the strength and historic growth of a company's return on invested capital. The company has generated more income per dollar of capital than 80% of the companies we review. strong 5.0 Price volatility out of 5 stars weak Measures the volatility of the company's stock price historically. The stock is less volatile than 90% of the stocks we monitor. strong 5.0 Solvency out of 5 stars weak Measures the solvency of the company based on several ratios. The company is more solvent than 90% of the companies we analyze. strong 3.0 Income out of 5 stars weak Measures dividend yield and payouts to shareholders. The company's dividend is higher than 50% of the companies we track. strong THESTREET RATINGS RESEARCH METHODOLOGY TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates. While our model is quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings. Objective elements include volatility of past operating revenues, financial strength, and company cash flows. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e.how much one is willing to risk in order to earn profits; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's performance. These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2014. All rights reserved. Report Date: October 12, 2014 PAGE 3 October 12, 2014 NASDAQ: COST COSTCO WHOLESALE CORP Sector: Consumer Non-Discretionary Hypermarkets & Super Centers Source: S&P Annual Dividend Rate $1.42 Annual Dividend Yield 1.10% Consensus EPS Estimates² ($) IBES consensus estimates are provided by Thomson Financial 1.08 5.15 E 5.69 E Q1 FY14 2015(E) 2016(E) Market Capitalization $56.3 Billion 52-Week Range $109.50-$130.74 Price as of 10/9/2014 $128.41 FINANCIAL ANALYSIS COSTCO WHOLESALE CORP's gross profit margin for the fourth quarter of its fiscal year 2014 has decreased when compared to the same period a year ago. The company managed to grow both sales and net income at a faster pace than the average competitor in its industry this quarter as compared to the same quarter a year ago. COSTCO WHOLESALE CORP has weak liquidity. Currently, the Quick Ratio is 0.59 which shows a lack of ability to cover short-term cash needs. The company's liquidity has increased from the same period last year, indicating improving cash flow. During the same period, stockholders' equity ("net worth") has increased by 13.56% from the same quarter last year. Overall, the key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the future. STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12-months. To learn more visit www.TheStreetRatings.com. INCOME STATEMENT Net Sales ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil) Beta 0.52 Q4 FY14 35,523.00 NA 1,091.00 697.00 Q4 FY13 32,487.00 1,249.00 954.00 617.00 Q4 FY14 7,315.00 33,024.00 5,093.00 12,303.00 Q4 FY13 6,124.00 30,283.00 5,230.00 10,833.00 Q4 FY14 12.63% NA 3.07% 3.41 6.23% 16.72% Q4 FY13 13.43% 3.84% 2.94% 3.47 6.73% 18.82% Q4 FY14 1.22 0.29 35.00 31.17 Q4 FY13 1.19 0.33 36.00 26.50 Q4 FY14 439 0.36 1.58 28.05 NA 1,799,229 Q4 FY13 437 0.31 1.40 24.80 NA 1,817,877 BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil) PROFITABILITY Gross Profit Margin EBITDA Margin Operating Margin Sales Turnover Return on Assets Return on Equity DEBT Current Ratio Debt/Capital Interest Expense Interest Coverage SHARE DATA Shares outstanding (mil) Div / share EPS Book value / share Institutional Own % Avg Daily Volume 2 Sum of quarterly figures may not match annual estimates due to use of median consensus estimates. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2014. All rights reserved. Report Date: October 12, 2014 PAGE 4 October 12, 2014 NASDAQ: COST COSTCO WHOLESALE CORP Sector: Consumer Non-Discretionary Hypermarkets & Super Centers Source: S&P Annual Dividend Rate $1.42 Annual Dividend Yield 1.10% RATINGS HISTORY Our rating for COSTCO WHOLESALE CORP has not changed since 8/6/2009. As of 10/9/2014, the stock was trading at a price of $128.41 which is 1.8% below its 52-week high of $130.74 and 17.3% above its 52-week low of $109.50. BUY: $99.64 2 Year Chart Market Capitalization $56.3 Billion $120 Price/Earnings $110 2013 From Buy To Buy Price reflects the closing price as of the date listed, if available RATINGS DEFINITIONS & DISTRIBUTION OF THESTREET RATINGS (as of 10/9/2014) 1 2 3 29.07% Hold - We do not believe this stock offers conclusive evidence to warrant the purchase or sale of shares at this time and that its likelihood of positive total return is roughly in balance with the risk of loss. 20.25% Sell - We believe that this stock is likely to decline by more than 10% over the next 12 months, with the risk involved too great to compensate for any possible returns. Research Contact: 212-321-5381 Sales Contact: 866-321-8726 4 5 Price/Projected Earnings 1 2 3 premium 4 5 2 3 premium 4 5 Price/Sales 1 2 premium 3 4 5 Price to Earnings/Growth 4 5 discount 1 2 3 premium 4 5 discount COST 2.45 Peers 2.82 • Discount. The PEG ratio is the stock’s P/E divided by the consensus estimate of long-term earnings growth. Faster growth can justify higher price multiples. • COST trades at a discount to its peers. Earnings Growth 1 2 3 4 lower 5 higher COST 0.64 Peers 1.66 • Lower. Elevated earnings growth rates can lead to capital appreciation and justify higher price-to-earnings ratios. • However, COST is expected to significantly trail its peers on the basis of its earnings growth rate. Sales Growth discount COST 0.50 Peers 0.56 • Discount. In the absence of P/E and P/B multiples, the price-to-sales ratio can display the value investors are placing on each dollar of sales. • COST is trading at a discount to its industry on this measurement. 3 COST NA Peers 12.08 • Neutral. The P/CF ratio is the stock’s price divided by the sum of the company's cash flow from operations. It is useful for comparing companies with different capital requirements or financing structures. • Ratio not available. discount COST 4.58 Peers 3.25 • Premium. A higher price-to-book ratio makes a stock less attractive to investors seeking stocks with lower market values per dollar of equity on the balance sheet. • COST is trading at a significant premium to its peers. 2 premium discount COST 22.57 Peers 18.05 • Premium. A higher price-to-projected earnings ratio than its peers can signify a more expensive stock or higher future growth expectations. • COST is trading at a significant premium to its peers. 1 1 Price/CashFlow discount COST 27.56 Peers 22.00 • Premium. A higher P/E ratio than its peers can signify a more expensive stock or higher growth expectations. • COST is trading at a significant premium to its peers. Price/Book 50.68% Buy - We believe that this stock has the opportunity to appreciate and produce a total return of more than 10% over the next 12 months. TheStreet Ratings 14 Wall Street, 15th Floor New York, NY 10005 www.thestreet.com Price as of 10/9/2014 $128.41 $130 premium MOST RECENT RATINGS CHANGES Date Price Action 10/9/12 $99.64 No Change 52-Week Range $109.50-$130.74 VALUATION BUY. COSTCO WHOLESALE CORP's P/E ratio indicates a premium compared to an average of 22.00 for the Food & Staples Retailing industry and a premium compared to the S&P 500 average of 18.70. Conducting a second comparison, its price-to-book ratio of 4.58 indicates a significant premium versus the S&P 500 average of 2.58 and a premium versus the industry average of 3.25. The current price-to-sales ratio is well below the S&P 500 average and is also below the industry average, indicating a discount. After reviewing these and other key valuation criteria, COSTCO WHOLESALE CORP proves to trade at a premium to investment alternatives within the industry. $100 2012 Beta 0.52 1 2 3 lower 4 5 higher COST 7.11 Peers 6.55 • Average. Comparing a company's sales growth to its industry helps to determine if the company is adding or losing market share. • COST is keeping pace with its peers on the basis of sales growth. DISCLAIMER: The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but TheStreet Ratings cannot guarantee its accuracy and completeness, and that of the opinions based thereon. Data is provided via the COMPUSTAT® Xpressfeed product from Standard &Poor's, a division of The McGraw-Hill Companies, Inc., as well as other third-party data providers. TheStreet Ratings is a division of TheStreet, Inc., which is a publisher. This research report contains opinions and is provided for informational purposes only. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in this report constitutes, or is intended to constitute a recommendation by TheStreet Ratings of any particular security or trading strategy or a determination by TheStreet Ratings that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Your use of this report is governed by TheStreet, Inc.'s Terms of Use found at http://www.thestreet.com/static/about/terms-of-use.html. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2014. All rights reserved. Report Date: October 12, 2014 PAGE 5
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