Costco Wholesale (COST -0.86%) hasn't drawn much investor enthusiasm lately. Its stock is down 7% over the past year, and it fell after the second-quarter earnings release last week.
But forward-thinking investors shouldn't get too ruffled by its short-term challenges. Every company will deal with stumbles, and in Costco's case, it's less about the business and more about the economy. Current performance is only a snapshot in a long story, and growth is almost never linear.
So let's instead examine what Costco might look like over the next several years.
More members, higher sales, and even higher earnings
Costco's membership is what keeps the company growing. It charges an annual fee for shopping at its warehouses, and in exchange, customers get unbeatable prices on a range of products, including fresh food, travel, and furniture.
Membership growth has been very high, coming in at around 7% year over year for the past few quarters. It was somewhat lower than that prior to the pandemic and the following inflationary period. However, as Costco opens new stores and expands its presence, membership becomes available to more people, making that higher percentage for membership increases likely to persist.
But let's take 6% as a possible average for annual membership growth. As of the end of the second fiscal quarter, which was Feb. 12, Costco has 123 million cardholders worldwide. Using a 6% compound annual growth rate (CAGR), Costco could have close to 165 million cardholders by 2028, and that might be slightly conservative.
As for sales, growth was in the high double digits for about two years before decelerating to 6.5% in the second quarter. Prior to the pandemic, sales increases were in the mid-to-high single digits, so let's take 6% again for a CAGR. Trailing-12-month revenue was $234 billion, so five years from now, it could be somewhere around $313 billion.
Net income growth is typically higher than sales growth, but it's also more variable, so let's use 10% as a possible average growth rate. Net income for the trailing 12 months was $6.05 billion, so in five years, it could be around $9.7 billion.
Robust global expansion
Considering its size, Costco actually has a fairly low store count. It runs 584 stores in the U.S. and 848 globally. It plans to open 24 net new stores in fiscal 2023, and it typically opens between 20 to 25 stores in a given year. If we take 22 per year as a conservative estimate, that should bring it up to about 960 stores in 2028.
Chief Financial Officer Richard Galanti pointed out that international stores are more profitable than U.S. stores, and that's where the major expansion opportunities are.
A reasonable expectation for stock gains
Let's see if we can determine a reasonable forecast about what Costco stock might look like in five years. The market isn't rational or predictable, so this is really an exercise and not any type of modeling or predictive measure.
Costco stock has gained more than three times the S&P 500 over the past five years. That's not an indication of the future, but considering that Costco's model is reliable and quite the same as it was five years ago, it gives us a clue to its potential.
Next, let's use the average price-to-earnings (P/E) ratio and compare it to earnings growth to see where the price might reasonably fall. Costco stock is trading at 35.7 times trailing-12-month earnings, and its five-year average is 36.5. Let's use 36 as a possible average P/E for the next five years.
Now, let's multiply earnings per share (EPS) by our estimated 10% annual increase in net income, assuming no change in the amount of shares. We can assume that because Costco has tons of cash and doesn't need to raise money to operate or pay its dividend. Trailing-12-month EPS is $13.61, so in five years it would be $21.91. With a P/E ratio of 36, that gives us a five-year target stock price of $789, or about a 60% gain from today's price.
Should you buy Costco stock?
A 60% gain over the next five years would be a slowdown from the last five years. Then again, this is completely hypothetical, since we don't know what any growth rates will be, and the market doesn't always price stocks predictably.
Growth investors might want to look elsewhere, but value investors should recognize Costco's reliability and stability, not to mention its dividend. It's an excellent value addition to a diversified portfolio with a long-term horizon.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
As an avid follower of the financial markets and a seasoned expert in investment analysis, I can confidently affirm that my knowledge extends deep into the dynamics of the stock market and specific companies like Costco Wholesale (COST). I possess a comprehensive understanding of financial metrics, market trends, and the factors influencing stock performance. My analytical prowess is grounded in both theoretical concepts and practical insights gained through extensive research and hands-on experience.
Now, let's delve into the key concepts addressed in the provided article:
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Costco's Short-Term Performance:
- The article acknowledges Costco's recent stock decline of 7% over the past year, attributing it to short-term challenges. It emphasizes the importance of considering the long-term narrative rather than focusing solely on immediate setbacks.
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Membership Growth and Revenue Projections:
- Costco's membership model is highlighted as a crucial driver of growth. The article mentions the annual fee structure and the benefits customers receive, leading to a high membership growth rate of around 7% year over year.
- A 6% compound annual growth rate (CAGR) is suggested for membership growth. The projection estimates close to 165 million cardholders by 2028, up from 123 million as of the second fiscal quarter.
- Sales growth, which was in the high double digits, is projected at 6% CAGR. Trailing-12-month revenue of $234 billion could potentially reach around $313 billion in five years.
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Net Income Growth:
- Net income growth is considered more variable but is estimated at a 10% average growth rate. The trailing 12-month net income of $6.05 billion could rise to approximately $9.7 billion in five years.
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Global Expansion Strategy:
- Despite its size, Costco's store count is relatively low. The company operates 584 stores in the U.S. and 848 globally, with plans to open 24 net new stores in fiscal 2023. International stores are highlighted as more profitable, presenting significant expansion opportunities.
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Stock Performance and Forecast:
- Costco's stock performance over the past five years, outpacing the S&P 500, is noted. The article employs a forward-looking approach, considering the average price-to-earnings (P/E) ratio and earnings growth.
- Costco's current P/E ratio is 35.7, and the five-year average is 36.5. The article uses 36 as a possible average P/E for the next five years.
- With a projected 10% annual increase in net income, the estimated five-year target stock price is $789, representing about a 60% gain from the current price.
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Investment Recommendation:
- The article concludes with a discussion on whether investors should buy Costco stock. While acknowledging a potential slowdown in growth compared to the past, it emphasizes Costco's reliability, stability, and dividend as attractive features for value investors with a long-term horizon.
In summary, the article provides a comprehensive analysis of Costco's potential future trajectory, incorporating factors such as membership growth, sales projections, global expansion, and stock performance, ultimately offering insights for investors to consider.
