Costco's Stock is a Bargain Right Now

- By Panos Mourdoukoutas

Costco Wholesale Corp's (COST) stock recent slide is a buying opportunity for long-term investors, in my opinion. The big-box retailer lost close to 3% of its value on Friday morning following a disappointing fiscal second quarter earnings report, and it's down close to 16% year-to-date.

Costco reported revenue for the quarter of $43.89 billion, up from $38.26 billion last year and representing a 14.7% increase. Net income was $951 million, or $2.14 per share, up from $2.10 per share in the prior-year quarter and slightly better than the $2.06 per share that Wall Street predicted.

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• COST 15-Year Financial Data

• The intrinsic value of COST

• Peter Lynch Chart of COST

Apparently, investors were expecting even better growth from Costco, but I think the slide is unjustified for a couple of other reasons as well.

First, the company decided to pass on the cost of increased wages for minimum-wage store associates to shareholders rather than absorbing these costs itself. Management estimates that these costs shaved 41 cents per diluted share off its earnings. However, it should be noted that workers actually having enough money to afford food is overall good for a leading grocery supplier. This is just another case of accounting trickery, not an actual headwind.

Then there are also Costco's comparable total sales, which are up 14.6% in the last six months. International comparable sales rose 17.1% over the same period, meaning that Costco's revenues could accelerate as the company expands overseas.

Costco currently operates 804 warehouses, including 558 in the United States and Puerto Rico, 103 in Canada, 39 in Mexico, 29 in the United Kingdom, 27 in Japan, 16 in Korea, 14 in Taiwan, 12 in Australia, three in Spain and one each in Iceland, France and China.

Over the last three years, Costco's sales and Ebitda rose 8.7%%, beating Walmart's (WMT) numbers but lagging Amazon's (AMZN) (see tables below).

Table 1

Table 2

Meanwhile, Costco is beating both companies in a key value metric, economic profit, meaning that it still enjoys a strong competitive advantage and creates significant value for its shareholders. The economic profit is the return on invested capital (ROIC) minus the weighted average cost of capital (WACC).

Costco's economic profit has been trending higher over time, from around 2% a decade ago to 9% recently, implying that it becomes more effective in earnings profits as it grows. This podes well for the company as it begins to look to expand in fast-growing overseas markets.

Superior economic returns have translated into an outstanding financial performance. For the period between 2010 and 2020, Costco has delivered a 20.10% average annual total return, beating Walmart's returns. The future looks bright for the company, as it has plenty of room to grow at home and abroad, where it has little presence currently.

Disclosure: I own shares of COSTCO and Amazon

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This article first appeared on GuruFocus.