Why I’m Thinking About Investing $1,000 in Costco Right Now

Costco Wholesale (COST 0.13%) recently reported quarterly results. While investors shouldn’t get too caught up in short-term results, they are important barometers of a company’s progress.

After reviewing Costco’s sales and earnings, it reaffirms my belief in the company’s concept and long-term future growth potential. That’s why I’m considering adding a $1,000 investment in the stock.

Granted, it will only buy one share at the current level. However, you can employ dollar-cost averaging, building up a meaningful position over time by investing the same amount regularly.

Here’s why I’m considering the modest additional investment.

Image source: Getty Images.

Sales and earnings growth

Costco’s sales momentum continued. The company’s same-store sales (comps) grew 6.4% in the fiscal fourth quarter that ended on Aug. 31. The figure excludes gasoline price changes and foreign-exchange translations.

Costco’s value pricing on a broad range of goods and services always has appeal. But with consumers stressed by high prices, it’s particularly attractive.

Fortunately, its pricing strategy doesn’t come at the expense of profitability. Costco’s operating income increased 9.8% to $3.3 billion.

Loyal customers

Costco didn’t disclose membership and renewal numbers in its quarterly earnings release. However, it has a history of membership growth and high renewal rates.

In the third quarter, the company reported over a 90% renewal rate, in line with historical figures. And this comes amid a membership fee increase at the start of the year. Clearly, they didn’t mind the increase and feel Costco membership still offers value. To management’s credit, it waited seven years before implementing the hike, which I’m sure members appreciate and helps build loyalty.

Total paid members grew to 79.6 million in the third quarter, up 6.8% from a year ago. The figure also increased over the previous quarter, when it ended with 78.4 million paid members. Based on its historical trend, it wouldn’t surprise me if the figure crossed 80 million.

Expansion opportunities

Costco has a simple concept of charging members to access its many goods and services at attractive unit prices. Management executes the plan very well, however. You can see that by looking at the aforementioned results.

Fortunately, Costco isn’t a mature business. It still has expansion opportunities. The company has been adding 20 to 30 locations annually. It finished the year with 914 warehouses, up 24 from a year ago.

More than two-thirds of them are located in the United States. However, Costco also has over 100 in Canada, 42 in Mexico, and warehouses across the globe in places like Japan, the United Kingdom, Korea, Australia, China, Spain, and France.

Sometimes, international expansion doesn’t go well for a variety of reasons. However, the concept looks like it’s doing very nicely outside of the United States. Comps at Costco’s Canadian locations grew 8.3%, and they increased 7.2% at other international warehouses.

Unfortunately, Costco’s shares don’t sell at a cheap valuation. The stock has a price-to-earnings (P/E) ratio of 52. Although down from over 60 earlier this year, it’s not a bargain compared to the overall market. The S&P 500 Index, a proxy for large-cap stocks, has a P/E ratio of 31.

However, with the company’s consistent sales and earnings growth, including during various economic cycles, I believe it’s worth paying a premium for Costco’s shares.