No. of Recommendations: 36
Has Costco ever been on sale? Everytime I've looked into it, it's looked very high.
Between 2010 and 2016 it traded at an average PE of 19. From 2010 until today, the price earnings has progressively - almost year by year - expanded and is now trading at a PE approaching 60. Not quite as crazy as the euphoric valuations in the late 90s, given Costco’s earnings durability —- for a firm anticipated to grow earnings at 18% for many years into the future, such a multiple makes sense, and for one growing earnings at 9%, this multiple is simply euphoric.
It may be steadfast but the IV10/price ratio is very uncompetitive with other opportunities.
In observing Costco’s great capital gains over this period, more of the gain is attributable to the valuation increase rather than the actual increase in earnings per share.
Sales per share (or EPS with margin normalized) has grown 9% a year the last decade, and a little higher on trend lately as part of that same average. This deserves a multiple higher than 15, but not 4 times higher.
The multiple will come down at some point, so future capital gains will struggle to keep up with the rate of increase in the EPS, thus likely much less than 9% per year over the next decade.
- Manlobbi
