Think Costco Wholesale Is Expensive? This Chart Might Change Your Mind.

Motley Fool
28 Jun
  • Costco stock has delivered a 2,320% total return over the past 15 years.
  • The company keeps growing its cash profits while earning increasingly strong returns on its business investments.
  • Costco’s ROIC even beats Amazon’s in the asset-light e-commerce sector.

Warehouse retailer Costco Wholesale (COST 0.25%) may sell goods at affordable prices, but the stock is pretty expensive. Costco investors have pocketed a total return of 2,320% over the last 15 years, leaving the S&P 500 index far behind at a 663% gain. The stock traded at a luxurious 55.8 times trailing earnings on June 26, or 59.6 times free cash flow.

Image source: Getty Images.

So you wouldn't be the first investor to call Costco's stock "expensive." But you might change your mind when you look at the chart below.

Costco's rising profits and efficiency

I'm about to show you a rare combination. Costco has a long-standing habit of growing its cash profits, while also making better and better use of the new capital over time.

COST Free Cash Flow data by YCharts.

Costco's financial engine runs smoother than Kirkland butter

Free cash flow is the profit that's left over after paying off operating expenses and capital expenses. This capital can be used to finance dividend payouts, execute share buybacks, acquire smaller rivals, or boost the balance sheet's cash reserves. It's a measure of real cash profits, rather than the tax accounting construct you know as net profit or earnings. And Costco earns a lot of cash profits.

Return on invested capital (ROIC) measures how effectively a company puts its profits to work. Costco's ROIC is nearly double the figures you see for Walmart (WMT 1.45%) or Target (TGT 1.83%) nowadays, and even exceeds Amazon's (AMZN 2.66%) ROIC in the asset-light e-commerce industry. The company also delivers consistently wider ROIC margins over time, while most retailers struggle to keep ROIC stable.

As Costco pairs richer ROIC readings with growing cash flows, it keeps feeding a flywheel of constant business improvements. That's an incredibly shareholder-friendly combination.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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