I will write two articles about Costco. Today is the first one, focusing on a simple introduction. Another blog post about Costco is “Costco’s moats, and the Differences from Other Competitors“
Super growth stocks are not necessarily in hot industries
Many friends have been telling me that they do not have a circle of competence in the technology field, and technology stocks will rise sharply, this will reduce the possibility of getting rich. In fact, it’s not the case. The reason is very simple. First of all, good companies are rare. If you invest in a few companies that investors are really familiar with for a long time, you will definitely get rich.
Moreover, investing in technology stocks, technology changes fast, it is too volatile and may not be suitable for most conservative retail investors. In addition to the article I wrote before, “Discover the possibility of super growth stocks in the civilian production industry“, today’s article can prove to you that super growth stocks are not necessarily in the technology industry. Super growth can also be found in ordinary industries.
Why we discuss Costco?
Many friends complained that listed companies on the US stock market are not accessible at all and it is difficult to conduct on-site inspections (shareholders, the company owner always wants to check the warehouse at any time). Fr example, Nike (ticker: NKE), I’m facing the channel of distributors, I don’t know what the company looks like, it’s ocean away in the United States.
But I want to conduct due diligence on listed companies as in the case of Holmes, otherwise I will not feel confident to buy its stocks. Well, this company can let you go anytime when you are happy. You can even visit its warehouse. It currently has 14 warehouses in Taiwan. It entered Taiwan in 1997 and it has been 25 years. It is not difficult to find from north to south.
I used Costco (ticker: COST) as an example in Chapter 2, Section 2-3, and Chapter 3, Section 3-1 in my book “The Rules of Super Growth Stocks Investing”, maily to explain the moat of a company. I suggest that friends who are interested, you can take a look at my two analysis on Costco in the book.
Costco’s business does not need to be explained. It is a traditional warehouse-Costco’s business does not need to be explained. It is a traditional super large-scale hypermarket. It is a typical physical retail industry. Its business includes food, fresh food, e-commerce, clothing, 3C mobile phone and computers, home appliances, consumer finance, and people’s livelihood products.
In Taiwan, because of the limited space, we see only a reduced version of Costco. I have actually been to many of the Costco warehouse in the United States. The Costco warehouse in the United States have a lot of people compared to other large supermarkets like Walmart (ticker: WMT), but they are not as crowded in Taiwan, and they have more tricks, not only product items. Each will have a gas station, sell a 10-carat diamond ring, sell private jet services, insurance, and credit loans. The services scope is simply dizzying.
The e-commerce net sales generated by Costco’s e-commerce division accounted for approximately 6% of the company’s net sales in 2020, which has doubled from 3% in 2015. At the peak time of the pandemic in 2020, the second to fourth quarter, Costco’s e-commerce department had an amazing annual growth rate of 75% to 101%.
But this figure also shows that Costco’s customer base is mainly made up of shoppers in person.
Business performance and valuation
Costco has proved that it is one of the few retailers that can resist Amazon. Just look at the following valuation table:
|Market capital (in US$ billion)||242.884||1,816||408.627|
|Past 1 year stock performance||41.54%||12.05%||-3.34%|
|Past 5 year stock performance||261.65%||383.62%||106.74%|
Please pay special attention to its price-to-earnings ratio, which is no worse than Amazon. Amazon is classified as a technology stock in Wall Street, and there is an oligo-profitable AWS cloud division. However, Costco is not a technology company, and even the e-commerce department is much worse than Amazon, and there is no cash cow like the cloud department.
It is a very traditional physical retail trade. It can have a higher price-to-earnings ratio than most technology companies, and other valuations; you can see how popular it is among investors. If I cover up the company name in the above table, everyone must think that this is the hot newly listed SaaS company. You may say that it is similar to Walmart, but please take a look at the stock price performance of the past one and five years!
How is the business performance?
|FY 2021 net revenue (US$ billion)||192.056||+18%|
|FY 2021 member revenue (US$ billion)||3.877||+9%|
|FY 2021 net income (US$ billion)||5.007||+25%|
|FY 2021 gross margin||11.13%||+7bps|
|FY 2021 carholders (million)||111.6||+5.78%|
|FY 2021 warehouse worldwide||815||+2.516%|
Costco’c current dividend yield close to 0.8%. It looks not quite amazing. However, Costco grows its yearly dividend by more than 277% in the past 10 years, which is quite a feat.
Costco is a rare case, in addition to distribute dividends quarterly, it will also issue additional large cash dividends from time to time. Over the last 10 years, Costco issued four special dividends. In the 2021 fiscal year, two special dividends have been issued:
- Ten dollars per share (December 2020)
- Ten dollars per share (April 2021)
In terms of stock repurchase, Costco did not fall behind. In fiscal year 2021, it repurchased 318,000 shares, which is equivalent to 0.0072% of the outstanding shares.
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