I just unloaded 50% of my current holdings… I have no idea why COST is trading at such a rich multiple.
tecmo
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Multiple of what? P/E? FWIW, I never look at that. I used to when I was first learning, but have since encountered numerous articles about why it’s almost meaningless.
https://www.investopedia.com/articles/fundamental-analysis/1…
What's In Those Earnings?
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Trailing or Forward Earnings?
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What About Growth?
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What About Debt?
This is one of the kinder articles I could have linked regarding P/E. Some excoriate it.
With COST, I like to follow Peter Lynch’s advice: go visit it. Even during COVID, the parking lot was full. The lines are long even when all registers are open (which is most of the time). The floor is crowded. They are doing gangbusters. So just check the report to see if there are any red flags (declining margins, increasing debt, etc), and go from there.
YMMV, and you have to make your own decision. That’s just how I see it.
1poorguy (long COST; and also a member)
2 Likes
Multiple of what?
Multiple of revenue. Historically CostCo has traded at a mulitple of 0.75 - 1.00 of its trailing 12 months of sales. It is well above that now, which is strange. One potential reason is that they are gaining new members and that they will hike the membership rate - but I doubt that will have a material impact.
tecmo
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Most of their revenues come from membership fees. The profit margins otherwise are rather lean. I’d have to look it up again, but I recall reading last year that they were planning on opening several more warehouses worldwide. Which means more potential members (so long as they don’t open them close enough to cannibalize their own membership).
They seem to be a juggernaut. They aren’t go-go growth, but they seem to be pretty steady and relentless.
1 Like
Most of their revenues come from membership fees. The profit margins otherwise are rather lean. I’d have to look it up again, but I recall reading last year that they were planning on opening several more warehouses worldwide. Which means more potential members (so long as they don’t open them close enough to cannibalize their own membership).
They seem to be a juggernaut. They aren’t go-go growth, but they seem to be pretty steady and relentless.
I think you mean most of their profits - which is true. Selling more merchandise isn’t going to improve their gross margins; but selling more memberships will. Yes they are executing extremely well - that is not my concern; its just that it seems to be getting ahead of itself and my expectation for future returns from $600 / share seem limited. I am not buying anything with the cash on hand from this sale - just keeping it open if there are other opportunities (keeping a close eye on DIS).
tecmo
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