A Company Investors Want to Buy in Bulk

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the new year begins, I would like to pinpoint on a trailblazer that has revolutionized the membership warehouse industry, Costco (NASDAQ: COST).

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Strengths:

  • Solid Revenue Growth: In 2007, Costco reported revenue of $64.4 billion; in 2012, the company announced revenue of $99.1 billion; representing year over year annual of growth of 7.88%, this trend is highly anticipated to sustain into the future, with projections placing 2017 revenue at $139.1 billion;due mostly from a combination of an increase in the number of Costco stores and revenue derived from each one of those Costco stores

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  • Rock Bottom Valuation: At the moment Costco carries a price to earnings ratio of 24.25, a price to book ratio of 3.42, and a price to sales ratio of 0.43, all which indicate a company with a rock bottom valuation when growth and future prospects are taken into consideration

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  • Geographical Diversification: Costco holds stores in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, Taiwan, and Korea, and this geographical diversification gives the company a greater level of certainty and predictability
  • Business Model: Costco sells memberships to their warehouses, with vary levels and prices, which locks in the particular person in for a year, and Costco is able to rely on this one-time revenue, and inside Costco also makes a slim profit on everything that is purchased, a consistent and reliable business model as customers are drawn to the stores because of the amazing deals offered
  • Institutional Vote of Confidence: 74.05% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Dominant Leadership Position: According to research done by L.E.K, Costco possesses a leading 50% market share position in the US warehouse club industry, and this leadership position displays the dominance of the company
  • Cash & Equivalents: Currently, Costco carries about $3.90 billion of cash and cash equivalents on their balance sheets, a major upside to the business

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Weaknesses:

  • Lack of Dividend: Because of the possibility of dividend tax hikes due to the fiscal cliff, in December the company paid investors a special dividend of $7.00, meaning there will not be any dividends in the coming years
  • Tight Margins: Currently, Costco possesses a net profit margin of 1.72%, well below the ideal double digit range, and this current net profit margin leaves little room for unexpected expenditures; these tight margins are a result of Costco's attempt to remain competitive
  • Debt: At the moment Costco carries about $1.36 billion of debt on their balance sheets, a major downside to the business

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  • Operating Expenses: As a business expands such as Costco’s has, the costs related to operating that business will expand, however over the past 10 years operating expenses have outgrown revenues, a troubling sign

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  • Dependence on Sluggish US: 41.17% of Costco’s business is derived from the United States; this dependence on the sluggish United States could prove damaging to growth

Opportunities:

  • Increasing Store Count: In the United States and internationally, Costco has expanded its store count over the past years (US 2006: 369 - 2011: 429/ International 2006: 102 - 2011: 163) and further growth in the number of warehouses is widely anticipated and could fuel growth into the future

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  • Sustaining Money Saving Mind Set: The consumer flocks to Costco because its system of capturing a one-time fee upfront and barely breaking even on the actual products has been proven to save consumers money, and if the money saving mind set sustains, Costco will enjoy increased membership  
  • Growth in Membership Fee: Costco has steadily increased the cost of membership, from on average $25.50 in 2006 to $30.00 in 2011, and further growth in the cost of membership is sure to spark growth

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  • Gaining Market Share: Costco current market share leaves plenty of room for the company to gain from Sam’s Club and BJ’s, and any gain in market share would lead to an increased number of members and greater revenues

Threats:

  • Competition: The warehouse membership industry is highly competitive, and competes with discount retailers and dollar stores, and the fierce battling to offer the best product for the least amount of money can lead to margin compression
  • Rising Input Prices: Costco prides itself on offering the best deals to its customers, and if input costs were to rise Costco would be faced with the difficult decision of passing the costs onto their customers or swallowing the pain in their already tiny margins

Competition:

Major publically traded competitors of Costco include Target (NYSE: TGT), Dollar General (NYSE: DG), Wal-Mart (NYSE: WMT), and PriceSmart (NASDAQ: PSMT). All of these companies operate in either the warehouse membership store industry, discount store industry, or dollar store industry, and rival Costco. Target is valued at $38.33 billion, pays out a dividend yielding 2.45%, and carries a price to earnings ratio of 13.05. Dollar General is valued at $14.14 billion, does not pay out a dividend, and carries a price to earnings ratio of 15.70. Wal-Mart is valued $227.71 billion, pays out a dividend yielding 2.34%, and carries a price to earnings ratio of 14.01. Finally, PriceSmart is valued at $2.26 billion, pays out a dividend yielding 0.80%, and carries a price to earnings of 33.33.

The Foolish Bottom Line:

Financially, Costco is as solid as a rock. The company possesses steady revenue growth, a decently sized pile of cash, and a small debt load. Additionally, the company’s future is packed to the brim with opportunities that should lead to growth. However, since the special dividend has been paid, investors in the company will not enjoy the benefits of dividends for years to come. All in all, Costco is a tremendous investment that has revolutionized the industry it currently operates in, and is certainly a company investors want to buy in bulk.   


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale and PriceSmart. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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