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Down about 10% from ATH, still looks VERY expensive but it always does - if it were to drop another $50 or so I might start to get interested - worth watching as the stock has had volatility in the past and provided nice entry points.

tecmo
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Looking at nothing other than the 5 year chart, it just seems like a normal pullback. Looking 2 years back, April 2022, is the sort of falling knife profile I wish I'd tried to catch. $612 on 4/8 to $406 on 5/20, or 34% drop in 6 weeks (with only a 13% drop in the SPX in the same period). I don't follow Costco closely, and don't remember if there were specific reasons for this at the time. But COST is capable of more serious volatility.

Over the past 5 years, COST has traded at an average PE of about 39. Over the past 10 years, average PE is about 34. Current PE is 46. Not in bargain territory even by its own current standards, which are lofty.

Over the past 5 years, COST has traded at an average PE of about 39. Over the past 10 years, average PE is about 34. Current PE is 46. Not in bargain territory even by its own current standards, which are lofty.

True enough.
It also seems that their normal lofty level has itself been rising for quite a while now.

Conveniently their EPS rise so smoothly that old fashioned P/E makes a reasonable yardstick.

Average trailing earnings year 20 years ago through 10 years ago equated to a P/E of 23.2
From 10 to 5 years ago that average was 28.9
In the last 5 years, 38.1.

So, if the last 5 years are the new (and presumed future) normal, then the current figure is only 21% more expensive than usual.
But if the old normal 10-20 years ago is the presumed future normal, then the current figure is 97% above expected.

I guess the only thing that pulls it down is a widespread bear. It traded down to a "mere" 21 for a while in 2009.
And when those disruptions happen, there are so many tempting targets that it still never seems like the best choice...so I never buy it.

Meanwhile, of course, they just make more and more money. The trend line of real EPS is a juggernaut, rising inflation + 8.78%/year in the last 20 years. Perhaps even a titch faster lately. Plus about another 0.6% in dividends.

Like so many people, I'd buy it if it got cheap. But since there are so many people like me ready to buy on dips, I have a hunch the stock price will generally stay well supported.

Jim

Another way to value; split the business into Retail Sales and Subscription Revenue and apply multipliers.

Here is one (reminder : all models have flaws, some are useful)

Retail Sales              : 98% of Revenue x 0.90 Multiplier  = 88.2
Subscription Revenue      :  2% of Revenue x 10 Multiplier    = 20.0

TOTAL                                                         = 108.2

They might do $260B in revenue this year x 108% = $280B Valuation (they are $315B or about 10% above this)

tecmo
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I don't know how to value it, but one thing I like about Costco is that they own most of their real estate.

We go to Costco a couple times a month. The place is always busy and the carts are always full. And the rotisserie chickens are always tasty.

Here is one (reminder : all models have flaws, some are useful)
Retail Sales : 98% of Revenue x 0.90 Multiplier = 88.2
Subscription Revenue : 2% of Revenue x 10 Multiplier = 20.0


An alternative view of the business strategy is that the entire retail operation is merely a break-even (or near-break-even) service to their members to encourage people to become and stay members. The whole point of the business is the otherwise costless subscription revenue.

Value of retail earnings at negligible net profit margin after cost of operations, multiple of 15, maybe 15% of total company value.
Value of steadily growing subscriptions at 100% gross profit, multiple of 33 on net profit after tax from that, accounting for 85% of company value.

If I did my sums correctly that works out to roughly an overall multiple of about 28 on trailing net earnings, close to the average in the last ~15 years.

Jim

Down about 10% from ATH, still looks VERY expensive but it always does - if it were to drop another $50 or so I might start to get interested - worth watching as the stock has had volatility in the past and provided nice entry points.

Was trading just over $700 when I posted this - and it didn't drop any further, so my $650 entry never triggered - which isn't uncommon for Costco (it teases you!). Now up to nearly $800 / share :(

tecmo
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Was trading just over $700 when I posted this - and it didn't drop any further, so my $650 entry never triggered - which isn't uncommon for Costco (it teases you!). Now up to nearly $800 / share :(

Don't feel bad. I think in this case you were perhaps right to have let the opportunity pass.
Costco is never cheap, but it has been unusually expensive lately even for Costco. The recent dip was not nearly enough to bring it back down to its own normal range.

Of course, this presumes that you want a good (better than average) entry price. If you believe in the solidity of their business model, as I do to a certain extent, it's one of those firms that you could overpay a bit and sit on it for a decade and still do pretty well.

Jim

Now up to $868 / share <moan>

tecmo
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Now up to $868 / share <moan>

Nah, don't moan.
If you owned it lately, you'd be thinking of selling now. And I probably wouldn't argue.

Figures from further up thread:
Average trailing earnings yield 20 years ago through 10 years ago equated to a P/E of 23.2
From 10 to 5 years ago that average was 28.9
In the last 5 years, 38.1.

The current figure is a little over 53. That's not just a high number, but it's a whole lot higher than its own usual figures.
Sure, it's a great firm, but there are lots of great firms, no?

As a random comp, again one of the very very few good businesses in retail, ever looked at Alimentation Couche Tard? (rough translation "night owl foods") ATD.TO, or a lightly traded ADR of ANCTF in the US.
If you don't know them, it's a Canadian-HQ chain of convenience stores in multiple countries, owner of Circle K among other brands, and attached gas stations. Like Costco it has earnings growing through the years like a juggernaut and a stock that never seems to sell off, but unlike Costco it's not wildly more expensive than its usual level. Trailing P/E around 19.

It's not a perfect company, and it's not Costco. But you do get about 2.8 times the initial trend earnings yield and a relatively comparable history of EPS growth...though a bit slower lately.

I owned it for a while and made good money, unsurprisingly. Then I did something stupid. During a market sell-off, almost everything I own or follow sold off...except this (see note above: "never seems to sell off"). So I sold it to buy something else on a big dip. This move made me the "big dip", because it's rarely cheap enough to me to feel good getting back in, and I haven't owned it since. <moan>

Jim

As a random comp, again one of the very very few good businesses in retail, ever looked at Alimentation Couche Tard? (rough translation "night owl foods") ATD.TO, or a lightly traded ADR of ANCTF in the US...

I'm not sure if this link will work, but it's the price history of Couche-Tard, along with rolling EPS and P/E ratio.

https://bigcharts.marketwatch.com/advchart/frames/...

The earnings trajectory is quite pretty.

Note, that's the graph for the Canadian listing, so the price and EPS are in Canadian dollars.
If you use ANCTF to get the US figures there isn't as much history, starts around mid 2015.

The same graph for Costco is of course even prettier.
https://bigcharts.marketwatch.com/advchart/frames/...

By eyeball, in both cases the earnings per share figures are roughly 4 times what they were in 2015.

Jim

This move made me the "big dip"

Well, Jim, I'm smarter than you. Because I do what you say and not what you do :)

I purchased ANCTF in May and June 2021 when you brought it to the board's attention (good buy points, btw). You also said it rarely trades at a PE above 30, so that would signal a good time to sell. I don't believe the PE has cleared 25 since then, so I still own it. About double the S&P 500 return since then. So I'm happy.

Thanks,
John

This is getting very painful to watch....

$892 / share now

tecmo
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This is getting very painful to watch....
$892 / share now

Bad case of FOMO ?
Don't worry, it's not fatal!

Jim

$892 / share now

If I owned it I'd be lightening up right now

If I owned it I'd be lightening up right now

Or covered calls would be tempting me!
(As it happens I do own it, in a quant portfolio, but it's pretty minor as a fraction of my overall investments.)

The earnings trajectory is so smooth that good old P/E gives a relatively stable valuation metric.
From 5-10 years ago, typical figures were 26-33. Current is about 55. Even for Costco, that does seem a bit rich.

The business is solid, and the growth hasn't really slowed down. All of sales/share, earnings/share, cash flow/share, dividends/share, and book/share are up 11%/year to 16%/year in the last 5 years. And pretty much all of those figures are higher than the equivalent metric for the prior 5 years.

At the other extreme, the firm that mystifies me is Coke. Real EPS essentially no change 2010-2023, if anything a trend line slopes downwards a hair. Flat if you include 2024 higher estimates. Sure, it's a steady earner and not going anywhere in my lifetime, but I don't see the charm in paying 26 times earnings for a cash cow, essentially a perpetual inflation protected bond with a 3% coupon. At that valuation level you can get shares in a solid and solidly growing firm.

Jim

I really need to pull this off my watch list - its painful!!!

tecmo
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