Charlie Munger's Favorite Stock is on a Tear

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Recently, Costco Wholesale (NASDAQ: COST) announced its impressive operating results for its fourth quarter and its fiscal year 2012 ended September 2012. The fourth quarter net sales were $31.5 billion, a growth rate of 14% from nearly $27.6 billion in the fourth quarter last year. At 2012, revenue reached $97 billion, a 12% increase from $87 billion last year.

For operating efficiency, Costco reported a healthy growth in comparable sales, as well as comparable warehouses. The comparable warehouses for the fourth quarter were 5%, whereas the whole year reached 7%. The increase sales, combined with the increase in comparable sales, certainly produced healthy profit growth. In fiscal year 2012, net income was $1.71 billion, or $3.89 per share, whereas 2011 net income was $1.46 billion, or $3.30 EPS. It represented a year-on-year EPS growth of 17.8%.

A higher membership fee contributed to the growth of the business. This year, it experienced an increase of 18%, to $694 million. Charlie Munger, Vice Chairman of Berkshire Hathaway, has advised investors that Costco was a great candidate to own in the long run. The wholesaler, by selling lower-than-market gas prices, has been very successful in attracting consumers to its warehouses to save money with its membership fees. Munger commented that by selling quality merchandise close to cost, Costco built a loyal customer base. “If you get hooked on going to Costco with your family, you’ll go for the rest of your life.”

Costco can still be considered as a large cap growth stock. It has grown extremely fast in the last 10 years. Since 2002, Costco’s revenue has grown from $38.7 billion to $97 billion, creating the annualized growth of 9.6%. In addition, the annualized growth of net income and free cash flow are 8.4% and 11.8% respectively. Besides, it is a constant growing dividend payer. In 2004, it paid $0.20 per share in dividends, and the current dividend is $1.10 per share. However, the dividend yield is around only 1%.

After the impressive earning results, its share price jumped 3.31%, to $102.80. The total market capitalization is $44.45 billion. Costco is valued at 26x P/E, 3.4x P/B and 13.4x P/CF. On a relative basis, Costco’s current valuation is just a little more expensive than its historical one. Here are its 5 years averages, its P/E is 23.9x, P/B is 2.9x and P/CF is 10.8x.

Compared to its peers including Target Corporation (NYSE: TGT) and Wal-Mart Stores (NYSE: WMT), Costco seems to be the most expensive. TGT is valued at only 14.4x P/E and 2.6x P/B, whereas WMT is valued at 15.6x and 3.5x, respectively. In the last 10 years, Costco enjoyed a 10.2% annualized revenue growth. Wal-Mart has the same rate of growth, whereas the growth of Target was 9.3%. Costco outperformed its two peers on recent yearly revenue and earnings growth.

<table> <tbody> <tr> <td> <p>%</p> </td> <td> <p><strong>COST</strong></p> </td> <td> <p><strong>WMT</strong></p> </td> <td> <p><strong>TGT</strong></p> </td> </tr> <tr> <td> <p><strong>1- year Revenue growth</strong></p> </td> <td> <p>12.4</p> </td> <td> <p>10.5</p> </td> <td> <p>9.1</p> </td> </tr> <tr> <td> <p><strong>1-year Earning growth</strong></p> </td> <td> <p>11.7</p> </td> <td> <p>1.3</p> </td> <td> <p>4</p> </td> </tr> </tbody> </table>

Recent year growth, Costco had both double-digit growth in revenue and earnings. Costco posted 11.7% earning growth recent year, while Wal-Mart and Target had quite low earnings growth, of 1.3% and 4% respectively. Furthermore, out of three, Costco has the lowest Debt/Equity. Its D/E is only 10%, whereas D/E of Wal-Mart and Target are 62% and 87% respectively. 

Indeed, since the bottom in 2009, Costco’s share price has experienced a wild run.

<img src="/media/images/user_14219/screen-shot-2012-10-11-at-121059-am_large.png" />

Since 2009, Costco’s share has advanced from $39 to $102.8 currently, marking an annualized growth of nearly 32% for investors in the last 4 years.

Bottom line

I agree with Charlie Munger’s idea that Costco is a stock to hold in the long run. Costco has the unique business model that attracts and retains consumers with its economies of scales and pricing power. However, at the current high valuation compared to its peers and its historical valuation, I would prefer to keep Costco on my watch list to wait for the opportunity to buy at the lower price.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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