Don't just think of Costco as a good place to shop. Think of its stock (symbol COST) as a good buy, says Ken Feinberg, co-manager of Selected American Shares and Davis New York Venture funds.
With 471 stores and $58 billion in sales last year, Costco is the nation's largest club warehouse chain. It generates annual revenues of $120 million per warehouse, compared with just $58 million in sales at each Sam's Club store. Higher sales per store mean that Costco benefits more from economies of scale.
Costco continues to grow. The number of stores will double over the next ten years, Feinberg says, and sales are rising 10% annually. The company has "fanatical management focused on value for the customer and managing for the long term," Feinberg says. Indeed, he thinks Costco can raise prices when it wants to. The company's operating profit margin is less than 3%. "They can raise that quite a bit," Feinberg says.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
At $49, the stock sells at 21 times the $2.38 per share that analysts expect Costco to earn in the 12 months ending this November. That's above the market's price-earnings ratio. But, Feinberg insists, Costco's shares aren't overpriced, given the company's growth potential and its strong balance sheet: Costco has virtually no debt and holds more than $3 billion in cash.
There are risks, of course. Costco has thrived because it offers better merchandise and service than Sam's Club. But Wal-Mart (WMT), which owns Sam's Club, has awakened to that fact and is now trying to catch Costco. Another risk: Costco's generous and steadily rising compensation costs, particularly for health care.
--Steven Goldberg
-
How Five States Are Worse Off After Trump’s Cuts to SNAP and MedicaidState Tax Due to Trump's new tax law, some states will experience a greater impact than others.
-
Happiness Improves at Age 50, Right? Maybe Not for EveryoneNew thinking about how happiness changes over our lifetimes shows that one group in particular gains the most contentment after age 50.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
Are These the Next Stocks to Split?Interactive Brokers' recently split its stock to makes its shares more accessible to investors. Could these high-priced stocks be next?
-
Stock Market Today: Stocks Bounce as US-China Tensions EscalateStocks were volatile to end the week and the month amid concerns a trade truce between the U.S. and China is splintering.
-
My Three-Day Rule for Investing: And If it Applies NowStock Market I've seen a lot in my career. Here's what I see now in the stock market.
