Interactive Investor

A stock with this kind of consistency is worth paying for

12th October 2022 09:38

Rodney Hobson from interactive investor

It has a great reputation and delivers the numbers year after year. Overseas investing expert Rodney Hobson gives his view on this members-only business.

When sales and profits are both up in double digits, you have to feel the company is worth a look. Step forward Costco Wholesale Corp (NASDAQ:COST), a company based in Seattle that sells wholesale to members only.

Perhaps because Costco is not readily visible with retail stores, it tends to slip under the radar of many investors big or small, yet it has proved a major success story, with sales up consistently year on year between 11% and 16% month on month throughout 2022. Not many companies anywhere can claim that sort of success.

Costco does have outlets, 815 in total, mostly in the United States, where it makes 72% of its sales, and Canada, which accounts for a further 14%. There are 29 warehouses in the UK from Aberdeen to Southampton. Goods on offer include food, non-food merchandise, pharmacy products and, at most outlets, fuel.

Individuals can pay for membership that allows them to buy goods more cheaply than in retail outlets, and some companies have found this a convenient way to purchase supplies, with about one in five members being other businesses. Food, including fresh food, accounts for just over half of all sales.

One drawback is that the range of goods tends to be limited according to what the company can lay its hands on at competitive prices.

Nevertheless, revenue rose 15% in the fourth quarter ended 28 August to $70.76 billion, while net profit jumped from $1.67 billion to $1.87 billion, an increase of 12%. Higher sales are running through to the bottom line.

While the fourth quarter figures last year were depressed by an $84 million write-off of information technology assets, which flatters this year’s comparison slightly, there is no denying that an improved performance continued through the past 12 months. Revenue for the full year rose 16% to $222.73 billion and net profits by a similar percentage to $5.84 billion.

The big surprise is that only about 7% of sales come online. There clearly must be scope to develop this side of the business, which includes same-day grocery deliveries, but it does mean that Costco’s growth has not been a one-off phenomenon with sales artificially bloated during pandemic lockdowns.

The shares have come off the boil since briefly edging above $600 in April, but the subsequent fall back to around $472 has more to do with the general setback on US stock markets and is not a true reflection of Costco’s prospects. The stock stands at a level that has proved both a ceiling and a floor over the past 14 months.

Source: interactive investor  Past performance is not a guide to future performance

Costco is admittedly still not cheap, with an above average price/earnings ratio of 35.5 and a yield of only 0.72%, but the rating is based on the very reasonable assumption that growth will continue apace.

Hobson’s choice: Investors cannot expect anything like the 200% rally in the share price seen between the start of 2018 and the end of last year, but the shares rate a buy below $480. The downside looks limited to $450.

Update: I urged caution on any investor who was considering buying Walmart Inc (NYSE:WMT) at $137 in February and remained lukewarm in May at $122 after quarterly figures fell well short of management expectations, although I did grudgingly allow a ‘buy’ rating at that time.

Source: interactive investor  Past performance is not a guide to future performance

My fear that “there is clearly scope for further disappointment” looked overcautious when, in August, sales and net profits were good enough to allow the retail giant to marginally upgrade its full-year guidance.

However, Walmart is hiring fewer staff in the run-up to Christmas than it did last year – 40,000 instead of 150,000 – so it is clearly worried about the impact of inflation on its margins. After a $10 rise since May, the shares are now worth only a ‘hold’.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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