Costco‘s (NASDAQ: COST) stock price has increased nearly 2x from $140/share in August 2015 to $274/share in August 2019. The increase was primarily driven by continuous increase in Total Revenue and Net Income margin. Revenue growth and margin increase are expected to continue in FY 2019. A positive outlook has also driven a rise in the price-to-earnings (P/E) multiple of the company.
Costco’s Revenue saw a steady increase over the years:
- Costco’s revenues have increased by 21.8% from $116.2 billion in FY 2015 to $141.6 billion in FY 2018, adding close to $25.4 billion to its revenue base.
- Revenues are further expected to increase at a rate of 6.3% to $150.5 billion in FY 2019, which would mark an addition of over $34 billion to total revenues over the period 2015-2019.
- Higher revenue is likely to be driven by strong performance in Costco US and International business.
- Costco US is the highest contributor to Total revenues and has had good growth over recent years. It grew from $72 billion in FY 2016 to $81.7 billion in FY 2018. Trefis estimates revenue to be $85.8 billion for FY 2019 (ended August 2019).
- Revenue from Costco International has seen a steady growth over recent years. It grew from $26.7 billion in FY 2016 to $31.8 billion in FY 2018. Trefis estimates revenue to be $34.4 billion for FY 2019 (ended August 2019).
Improvement In Profitability:
- Net income margin remained nearly flat from 2.05% in FY 2015 to 2.06% in FY 2017. In FY 2018 it increased sharply to 2.21% thus reflecting an increase of 15 basis points, due to lower effective tax rate and reduction in SG&A expenses as % of Total revenue.
- Net income margin is expected rise to 2.28% in FY 2019, the increase to be pushed by lower effective tax rate and better operational efficiency.
- Costco’s P/E multiple has increased from 26.1x in 2015 to 35x as of August 2019. This is because of Costco’s continuous improvement in revenue and Net margin combined with its current positive outlook.
- Similar trend was observed in close rival Walmart’s multiple as it rose from 15.1x in 2015 to 37.5x in August 2019, however, Target’s earnings multiple during this period has just seen a 7% growth from 13.7x in 2015 to 14.7x in August 2019.
A higher multiple and a positive outlook bodes well for Costco’s stock and fundamentals. As per Costco’s Valuation by Trefis, we have a price estimate of $270 per share for Costco’s stock.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.