Sometimes, even great, growing companies cost too much to buy.
Costco Wholesale Corporation (COST -1.53%) investors had a good week. From last Friday’s close below $744 through Friday, May 10, shares of the warehouse retailer gained roughly $40 in value after reporting strong e-commerce sales in its update for April.
And $40 could be just the beginning. Loop Capital analyst Laura Champine predicts that, within a year, Costco shares will fetch $840 apiece.
Is Costco stock a buy?
Costco reported Wednesday that total sales grew 7.1% year over year in April and its “comparables” (i.e. same-store sales) grew 5.6%. That compares to 7.7% in May — so a sequential slowdown. Champine responded to the news by lowering her estimate for same-store-sales growth through the rest of this year, theorizing that inflationary pressures may be restraining consumer spending at Costco.
Nevertheless, this inflationary effect was largely expected. Inflation comes and goes and doesn’t necessarily change the long-term picture for the business, which Champine says will “perform well in a variety of macroeconomic scenarios.”
In addition, as you can see from the above numbers, Costco’s new-store growth enables it to grow sales faster than its same-store sales rise. With Costco expected to build 29 new stores this year and accelerate new-store growth to as many as 37 new stores annually by 2028, sales and earnings growth should accelerate, as well.
Despite all this, it’s hard for me to call Costco stock a buy right now. Valued on earnings, Costco, at a $345.5 billion market capitalization, sells for a rich 51x earnings multiple. The stock’s even more expensive when valued on free cash flow, which lags reported net income by about 9%.
As dominant as Costco is in its sector, 50x or 60x profits seems like a lot to pay for a business that most analysts agree will only grow profits at about 10% annually over the next five years.
I won’t buy Costco at its present price of less than $785. And I definitely wouldn’t pay $840 for Costco stock.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.