Costco Wholesale Corporation (COST) at $80 per share trades at 24 times the estimated fiscal year 2011 earnings per share. With Costco's fiscal year ending in August, the year and earnings are nearly in the bag.
In comparison, Standard & Poor's reported in April a 2011 P/E of 14 for the S&P 500 index and 15 for the consumer staples sector. A prudent investor might ask: Are the Costco results justifying the higher valuation or is the company poised to increase its rate of growth?
For the company's third quarter which ended on May 8, revenue increased by 16 percent to $20.19 billion from $17.39 billion. Net income increased at a lower rate to $324 million or 74 cents per share from $305 million or 68 cents one year earlier. For the first three quarters of FY 2011, Costco produced net earnings of $2.22, a 13.8 percent increase over the first three quarters of 2010.
Much of the surge in revenues is due to higher gasoline prices. Comparable store sales results increased by 9 percent for the first three quarters. However, if gasoline sales are excluded, the comparables drop to a 6 percent gain. For the U.S. stores, which represent almost three-quarters of the company's chain of warehouses, the comparable sales numbers were gains of 6 percent and 4 percent, respectively.
As of May 8, Costco owned 581 retail warehouses. An additional 11 will open by the end of the fiscal year on Aug. 28. The rates of earnings growth and new store openings are well below levels which would seem to support a 24 earnings multiple.
Positive factors for Costco investors include a recent dividend increase to 24 cents per share quarterly from 20.5 cents and a board authorization for up to $4 billion in share repurchases.
After the third quarter earnings release, analyst Mark Wiltamuth of Morgan Stanley noted that Costco is in a better position than its competitors to pass along price increases from inflation. In addition, analyst David Schick of Stifel Nicolaus & Co. believes Costco has growing momentum in membership and sales.
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