Investing

Hot Stock: Costco

A rare large cap growth company.

It may not come as a surprise to many that Costco (NASDAQ: Cost) is stock worth owning. Just think about how much you spent the last time you were there. Well, it turns out a lot of people’s bills are just as exorbitant as yours. While that might not be so great for wallets, it’s good news for investors.

On May 30, the company announced its Q3 results and revealed that revenues were up nearly 8% to $23.6 billion year-over-year, while profits climbed 19%. Its earnings per share of $1.04 beat analyst estimates by 0.97%.

Many analysts are pleased by the Issaquah, Wash-based bulk grocery store’s results. For Michael Exstein, one number that stands out is its 19% year-over-year increase in membership fees, which translated into an 11.8% jump in membership-related revenues. A lot of those gains were seen in Asia, he wrote in a May 30 report.

As well, same store sales climbed by 5%, while shopping frequency climbed by nearly the same amount. Exstein points out that Mexico and Canada saw the best same store sales of all of Costco’s international locations.

Christopher Horvers, an analyst with J.P.Morgan, thinks the company will continue to grow its international business. He wrote, also in a May 30 note, that the company only has about 178 stores outside of the U.S., which is less than many of its peers. “It has little exposure to Europe (and) room to grow in Canada, Mexico, Australia and Asia,” he writes. “In our view, it is rare to find a proven international model (like Costco’s).”

There are other reasons to like this business: it increased operating margins by 20 basis points to 3% of total revenues in Q3 and it’s also in a sector that typically isn’t as badly affected during a recession. People will always need to buy groceries and you can stock up for weeks at Costco.

More than 50% of analysts think the stock is a buy, with 12-month price targets topping $125 a share. It currently trades at $110. Investors also get a 1.12% yield. It’s not cheap, trading at about 25 times earnings, but it’s also growing faster than many of its peers. “This remains one of the only large cap growth companies left in retailing,” says Exstein.

For more investing insights, follow Bryan on Twitter @bborzyko.

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