Costco Wholesale Corporation (NASDAQ) has experienced a remarkable near–50% price increase since its low in March.

Costco has large warehouses that are membership-based, primarily in the United States but also internationally.

It offers a wide range of products. The company sells many products, including food, fuel, automobile services, apparel and appliances.

But the stock might be overvalued by the markets. So, COST is not a concern for us. TipRanks shows Costco stock chart.

International Expansion Can Help Improve Margins

Where does most of COST’s money come from? COST’s revenue comes from three sources: 72% from the United States and 13% from Canada. The remaining 15% is from foreign sources.

As of February 14,2021, 59%, 13%, and 15% of operating income come from the United States. The remaining 23% comes from Canada.

Operating income in the U.S. is lower than revenue, which shows it’s more profitable elsewhere. It is important to notice this because COST is more likely to grow internationally than its domestic footprint.

Therefore, if international growth outpaces domestic growth going forward, Costco’s overall operating income margins could improve. Analysts agree that the operating income margins could rise to 3.5% and 3.6% by 2022 respectively, from their current 3.4% levels.

Lots to Like

For starters, its revenue has been consistently growing every year when looking at data going back all the way to 2006, with the exception of a small slowdown in the 2009 recession. The five-year CAGR for revenue is 10.5%. Looking forward, the COST will grow slightly less than 8% in 2022 and 2023.

Given its reputation of consistent growth, it wouldn’t be unreasonable to expect mid-to-high single-digit growth for a few more years after that.

The steady growth in earnings per share has been impressive. It has grown at 16.2% CAGR over the last five years and will continue to rise in the single digits in the future.

The returns on capital invested by COST are also impressive. COST’s latest 12-month average ROIC is 17.1%. Coincidentally, its five-year average ROIC is also 17.1%, and this figure has been very stable, indicating that competition is not chipping away at Costco’s returns. Its ROIC is high in general, and ranks well compared to most peers, with Walmart (NYSE:) and Dollar General (NYSE:) having ROIC’s of 13.6% and 12.7%, respectively, but with Target (NYSE:) having a 21.9% ROIC.

As COST can reinvest its profits at high rates of return, it will continue to generate positive long-term growth.

You can also look to COST’s stable gross profit margins to indicate that competition is not getting in its way. Gross margins hovered around 12.4% to 13.3% over the last 10 years. This is a tight, stable range.

This margin is not as high as the average consumer staples industry margin of 31.1%. However, Costco makes up the difference with the $195.9 million in revenue it has generated over the last year.

Wall Street’s Take

Turning to Wall Street, Costco has a Moderate Buy consensus rating, based on 14 Buys, six Holds, and zero Sells assigned in the last three months. Costco’s average price target is $483.17, which implies that there are 7% upside possibilities.

Final Thoughts

Costco is a reliable stock with high returns on capital, and an economic moat that should do well in the very long term.

But, we are neutral as we believe there are better alternatives.

Stock Bros Research didn’t hold any position at publication in the securities discussed in this article.

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