COSTCO Fundamental Analysis

Daniel Jacome of Catablast submitted to us a copy of a fundamental analysis stock report on COSTCO (COST).

Here is a snippet of the report.

Investment Recommendation:
We encourage investors to HOLD Costco and weather any temporary blips in share prices. COST’s fortune rests on consumer spending patterns, fuel prices, and its ability to compete with Wal-Mart/Sam’s Club cost advantage and mass retailers like Target, which does not charge membership fees. Nevertheless, continued success in the grocer category - as well as addition of more private label goods to the inventory mix - should lead to slight margin expansion and ultimately, a higher valuation in the marketplace. Should Costco hit another stride, we believe the firm will continue to leverage its cash-flush balance sheet by aggressively repurchasing its stock and paring down debt/equity by as much as 200 bps. A possible Fed funds rate cut in Q107 could create further upside for COST shares — with shares floating near our fair price level, we encourage investors to buy judiciously on pullbacks.

Customer Loyalty Remains Robust:
Costco has found its profit pool in the fees it charges members to join, which creates a high switching cost once customers have paid in. Membership renewal rate of 86% is sustainable, in our opinion. Recent penetration of the grocer category as been an overwhelming success for Costco (fresh food sales in Q4 surpassed every other merchandise category), which could help narrow the gap between Costco and behemoths like Kroger and Wal-Mart, which lead overall US grocery sales. We estimate that Costco’s membership fee, which accounts for 72.5% of EBIT and generates recurring revenue streams, will grow at a 5% CAGR over the next 3 years.

View the full fundamental analysis of COSTCO (COST). Thank you Daniel for sharing your analysis!