Should Costco's Shares be Purchased in March 2025?
The Alluring Appeal of Costco Wholesale 🛍️
Costco Wholesale, or COST, continues to be a crowd favorite, known for its wallet-friendly prices, vast product range, and iconic $1.50 hotdog combo, which hasn't budged since 1984. This big-box retailer isn't just a hit with consumers; it's also a prime choice among investors. Billionaire Charlie Munger, renowned for his work with Warren Buffett, has held stock in Costco and sat on its board for years. Since the early 1980s, Costco has delivered returns exceeding an astounding 150,000%. But does this stellar reputation guarantee future success? Let's delve into this query.
Understanding Costco's Competitive Edge
Navigating through the highly competitive retail space can be like a wild ride, but Costco Wholesale has excelled in carving out its own niche as a leading big-box warehouse club retailer. With almost 900 stores scattered globally, including 617 in the US, and generating a staggering $264 billion in revenue within the past four quarters, Costco's business model is robust.
Selling products at minimal margins and generating profits from membership fees, Costco's last quarter saw membership fees totaling $1.19 billion. This modest slice of total revenue, representing just 1.8%, accounted for an impressive 51.5% of total operating income! An attractive product range, low prices, popular private-label brands, and quirky perks, such as the $1.50 hotdog, are all elements contributing to Costco's towering reputation among shoppers.
In 2023, Axios ranked Costco as the second-most trusted U.S. company among consumers. This powerful brand influence is so potent that Costco doesn't need to invest in advertising.
Steady Growth Likely to Last Decades
Costco's affluent customer base, usually high earners, is a goldmine for the company. Since purchasing in bulk often requires considerable upfront investment, this demographic generates approximately half of all consumer spending in the US. A glimpse at Costco's financials over the past decade reveals consistent growth without significant interruptions.
COST Revenue (TTM) data by YCharts
Intriguingly, the bulk of Costco's success can be attributed to natural growth rather than strategic interventions. Over the past decade, the number of active Costco warehouses has ballooned from 540 to 897. Additionally, with the passage of time, inflation contributes to growth when you're a cost leader selling goods with barely any markups.
Similarly, the growth of Costco's memberships is driven more by volume rather than price increases. Last quarter, memberships increased by 6.8% year-over-year. After a membership fee hike late last year, the most recent basic membership fee in the US stands at $65 (premium membership is $130), still a reasonable rate leaving room for future adjustments, if needed.
Many analysts predict Costco will increase earnings by an average of about 9% annually, a forecast closely mirroring the company's growth history and market position.
Should You Invest in Costco Wholesale in March 2025?
Given Costco's track record and growth prospects, it's likely no surprise that it's an excellent long-term investment. However, valuation is a wild card that can hinder stock returns, even for high-performing companies. Unfortunately, Costco Wholesale is quite pricey at the moment.
At the time of this writing, the stock trades at a price-to-earnings ratio of 56, a sharp descent from its all-time high but still high compared to its historical median of 40.4 and competitors like Walmart and Target. I often refer to the PEG ratio (price/earnings-to-growth) to evaluate a stock's valuation against its anticipated growth. A preferable range falls between 2.0 and 2.5. Costco's PEG ratio currently sits at 6.2, well beyond this threshold. This suggests that the stock could drop by 50% from its current price and still be termed expensive.
Investors are encouraged to snap up Costco Wholesale stock, but prudence dictates waiting for a significant price decline or increased earnings growth to justify a higher valuation. Unless unforeseen circumstances arise, it seems unlikely that Costco Wholesale is worth buying in March 2025.
- Investors considering Costco Wholesale as a long-term investment in March 2025 should be aware of its current valuation, as the stock trades at a price-to-earnings ratio of 56, higher than its historical median and competitors.
- While Costco's PEG ratio of 6.2 could suggest a potential 50% drop in stock price to justify its valuation, many analysts predict an average annual earnings growth of about 9% for Costco, close to its historical chart.
- Costco's stellar reputation and growth prospects make it an attractive choice among investors, but its high valuation in March 2025 might require other catalysts, such as a significant price decline or increased earnings growth, before being deemed a worthwhile investment.
- The ongoing appeal of Costco Wholesale lies in its robust business model, which generates profits primarily from membership fees and low prices for a vast product range, leading to consistent growth over the past decade without substantial interruptions.
