Many investors consider Costco (NASDAQ: COST ) to be overvalued and ready for a correction. Charlie Munger currently owns 181,541 shares of COST stock; that's up from 83,884 at the end of 1997, his first full year as a director of the company. That's a 4% annual increase in the number of shares owned over the past two decades.
I can't pretend to know what Charlie Munger thinks about Costco's valuation at the moment. However, he probably views it as a great long-term hold having been a director for 21 years.
Over those same 21 years, he's reduced his Berkshire Hathaway (NYSE: BRK.A , NYSE: BRK.B ) stake from 18,090 Class A shares in 1999 (according to the earliest year the DEF 14A is available) to 4,845 today.
Clearly, Munger has been doing some estate planning and philanthropic efforts over the past 20 years. If he was a slightly younger man, he'd probably have kept all of his Berkshire Hathaway shares, but as I said, I can't pretend to know what he's thinking.
What I can do is provide a small sampling of thoughts from analyst and media pundits. By the end, Munger and the rest of the investing public ought to have an idea of what the semi-informed think about COST stock.
COST: Same-Store Sales
Costco doesn't announce Q4 2018 results until Oct. 4. Until then, Costco stock investors will have to live with the monthly sales reports it provides.
"June sales beat expectations. Headline comp of +9.7% beat our +8.0% model and +7.3% Street. This was a core strength beat," wrote Consumer Edge Research analyst David Schick in mid-July. "Core U.S. comp of +7.7% is well above our +6.0% model and +5.8% Street."
July sales will be out any day now.
Last year's July comps, excluding changes in gas prices and foreign exchange, were 5.3% overall with 5.5% in the U.S., 4.0% in Canada and 5.9% internationally.
If you follow e-commerce, as I'm sure Munger does, you know that Costco is late to the online party, but it is doing its darnedest to catch up adding grocery delivery to its online offerings.
In June, Costco's e-commerce sales grew 27.7% over last year on top of May's 33.3% increase, a sign that Costco is delivering on its online ambitions.
"Analysts are weighing in on the report this morning," Barron's reported, July 12. "Although e-commerce trends declined, he [Stifel analyst Mark Astrchan] writes that online sales are still benefiting from Costco's 'efforts around selection, value, awareness, and experience.'"
Sure, COST stock has a long way to go to catch up with other retailers with just $5.6 billion in e-commerce revenue (or 4.0% overall) over the trailing 12 months, but it's up from $4 billion at the end of 2016, a sign that it's slowly gaining traction.
Bottom Line on COST Stock
Should Munger be buying COST stock at current prices?
As a long-time value investor, I doubt he's very enthusiastic about buying Costco stock at 16 times cash flow. However, when compared to Amazon (NASDAQ: AMZN ) at 42 times cash flow and possessing similar business models (Prime membership vs. Costco membership), it becomes a relative value.
As a director of more than 20 years and a man who is worth more than $1.8 billion, I do believe he ought to be buying more COST stock.
Long-term, say three to five years, I believe $223 is going to be an excellent deal.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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