Essay on Investment in Costco

Submitted By Linda-Dellapia
Words: 4916
Pages: 20


The Company we choose to analyze is Costco (COST) and while our analysis has found the company to appear to be overvalued at the current stock price of $142.99 we are suggesting that investors should BUY as we believe there are many indications that the stock price will continue to climb due to the company’s strong and consistent performance in the sector as well as their risk and return metrics. We believe that Costco’s strengths lie in its revenue growth, growth in earnings per share, and increases in net income. The company has also demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. Most recently they released an announcement of a $2.2B special cash dividend to stock holders made available by their very strong cash position which we believe will continue to attract new investors to this stock.

The secret to Costco’s success lies in their engagement with their members. It is apparently in vogue to be a Costco member as is seen in their continued growth in membership enrollment. Their customers are loyal to them and recognize the value in paying to have the privilege of being a Costco member. Their renewal rate is the highest of their competitors at 90%. Memberships enrollments were virtually unaffected by the recent increase in membership prices which are the higher than any of their competitors. Retail prices are razor sharp and the shopping experience is made positive by the in store sampling, no hassle return policy (without a receipt), and the great values on name brand and store brand high quality products at tremendous savings vs. traditional retail stores. Given that about 75 percent of Costco's operating profit comes from membership fees alone, "literally every decision Costco makes comes down to what the member wants,” says analyst, Altukhaim. Costco's Kirkland brand, which accounts for about 20 percent of the company's sales, is one of the reasons Costco’s members are so loyal. By using the Kirkland brand to sell quality products at an affordable price, Costco has convinced consumers to trust Kirkland, and Costco by extension.

Costco’s employees are often longtime associates that have risen through the ranks and are equally as happy with the Costco club experience. Better paid, with significant chances for advancement given the growth the company is experiencing these workers are engaging with members in a much more positive way than can be found in Costco’s competitors. They promote their employees from within the organization and have a reputation as being an outstanding employer.

Costco has managed to deliver value consistently to shareholders, customers and employees. While the stock clearly seems premium priced based on the DDM as well as other factors we think it has additional room to increase. We will review the financial and economic metrics we used to make this recommendation below.

Background Information on the Company

Founded in 1983 by James D. Sinegal and Jeffrey H. Brotman and headquartered in Issaquah, WA, Costco Wholesale Corporation operates membership warehouses, offering members low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories. The company warehouses present exclusive product category selections to be found under a single roof, including dry and institutionally packaged foods, snacks, candy, tobacco, alcoholic and non-alcoholic beverages, cleaning supplies, appliances, electronics, auto products and tires, health and beauty aids, hardware, garden, patio, funeral, and office supplies. Other products are meat, deli, bakery and produce, apparel, small appliances, and home furnishings.
The company also provides ancillary services by operating pharmacies, gas stations, optical dispensing centers, photo processing centers, and travel business. By the last quarter of 2014,