Costco's Upside Is Limited Due to Valuation

Core Viewpoint - Costco Wholesale Corp. has historically delivered exceptional investment returns, with a total return of approximately 760% over the past decade, significantly outperforming the S&P 500 and the retail sector [1][7]. Company Overview - Costco operates around 878 member-only warehouse stores, primarily in the U.S., which accounts for nearly 73% of total revenue, followed by Canada at approximately 14% [2]. - The company has demonstrated efficiency in a competitive retail industry, consistently generating returns on invested capital above its cost of capital, benefiting from economies of scale and a loyal customer base [2]. Valuation Comparisons - Costco's current price-earnings ratio is about 50, which is at the top end of its historical valuation range, compared to an average of roughly 34 over the past decade [3]. - In comparison to Walmart, which trades at approximately 27 times forward earnings, Costco's valuation appears excessive despite expected higher growth rates [3][4]. - Costco's valuation is also high relative to other high-quality companies like Microsoft and Mastercard, both trading at around 31 times forward earnings [4]. Growth Potential - Costco plans to open 12 new stores in fiscal 2024, with a focus on international expansion, particularly in China, which could provide long-term growth opportunities [6]. - The company has historically maintained gross margins around 14%, and while increasing margins could enhance earnings, the CEO indicated no plans to change this strategy [6]. Takeaways - Costco's strong historical performance is attributed to earnings growth and multiple expansion, but the current valuation of approximately 50 times earnings is significantly above historical averages and peers [7]. - International growth presents a long-term opportunity, but is unlikely to provide the near-term earnings growth necessary to justify the high valuation [7].