Costco (COST) Stock | Long Term Analysis | Overvalued or Undervalued |

Transcript (auto-generated)

All right hello and welcome everybody tyler’s talking about spirit where today we’re talking about costco wholesale to disable c-o-s-t this company is traded on the nasdaq currently and i feel like i should bring some more attention to this very popular growth stock what we’re going to do in this video is talk about whether the stock is currently over bagged or undervalued and then we’re going to give you a long-term announcement on this company so you can decide for yourself whether or not you’d be interested investing and holding this company for maybe 10 plus years anyway if you like this video please do like subscribe it’s about our channel and let’s get this content out to more people so that more people understand how costco works and also how the other stocks that we talk about work as well on our channel anyway thank you so much for watching without further ado let’s get started alright so costco has about 795 stores and they derive most of their sales in the united states accounting for about 73 of the revenue this company offers a great business model selling large quantities of product at bulk pricing this can save the average customer quite a bit of money if they purchase quite a bit of food then not only that costco makes plenty of money off of their membership program and they’re able to retain customers from this too it encourages customers to shop at costco primarily in order to make use of their 60 a year membership some nice perks of this membership are not only the grocery store pricing that you get that tends to be better because of the bulk pricing but also at three-fourths of the costco stores there are actually membership only fuel pumps that actually give people a fair price than most fuel pumps in their area so the overall point of this is that people will probably go to costco and use their membership over there while they’re shopping so they will maybe refill their car while they’re shopping do other things like that they also have a lot of services because this company is quite popular for not only grocery store shopping but also um services appliance shopping electronics shopping et cetera overall costco runs a multinational grocery store electronic store auto store and service business with about 288 000 employees that’s about twice the employees that general mowers has for comparison costco thrives by saving people money and we consider this business to be well positioned to grow over the long term now unfortunately the market has priced the stock very high recently and this is where we have to be very careful so if we talk about the value of this company we can see the company’s intrinsic value for costco stock is at about 140 and 36 cents a share now the point of this is basically the stock should trade towards the intrinsic value this is like the fair value of the company so what we’re doing here is we’re taking the projected free cash the model of calculating the intrinsic value in order to calculate this and of course there are many ways of calculating the intrinsic value this is just one way so let me show you how this way works i think this is very simple here we can see that the growth multiple is at about 13 which is pretty high for this company essentially what the growth multiple is is it’s a projection of the growth of the earnings each year so the growth multiple will be higher if the company is projected to grow faster and faster faster in earnings each year however if the company has a low growth multiple this means the company is projected to grow slower than most other companies so therefore the growth multiple for costco is pretty high because the income has grown a lot in the past we can also multiply this by the free cash flow which is a six year average of that then we have the total stock in equity which is simply the assets mice day of the company multiply that by 0.8 and then divide by the shows out staying in the market in order to get the intrinsic value per share of the company when you’re buying a stock basically what’s going on is already a lot of people are projecting the growth of the company so when you’re buying a stock you’re already paying a little bit of a premium that’s why this growth multiple has to be taken into account in order to determine the fair value of the company at this time now this also shouldn’t change very often because if companies and income increases then the company’s value may change a little bit but the assets of the company likely won’t change very often and therefore the company’s interesting value is likely not going to fluctuate very much in the near term so i think that this company basically if it trades over 140 a share is suggested to be more overvalued and if it’s basically under 140 a share is suggested to be more undervalued this company currently has a book value of about 40 a share this is 39.75 to be exact per share so that is the assets per share of the company so therefore if the company currently trades where it’s at which is at about 450 a share that is very high relative to the asset value per share of the company so from a value investor’s perspective this is really high and therefore i would not be interested in buying this company as a value investor however i like to look at this company for its growth this is why people are buying costco and this is why people are buying costco at these current valuations people understand that costco is not a value stock it’s a growth sock so it’s very different it’s because a lot of people like to essentially invest in a company that is going to do very well over the long term and costco is one of those stocks that has a phenomenal business model like we talked about before so despite the fact that the book value is low and therefore the intrinsic value is going to be more volatile because the asset value is not helping to support the intensive value as much as it should but we should really be looking at the growth of this company by its earnings we can take a look at the company and see if the company is making about 1.22 billion dollars a quarter so that brings in about 4.8 billion dollars a year so this is very impressive for a grocery store they have to spend a lot in order to build more grocery stores and so it just costs a lot and therefore this growth tends to be pretty slow for costco on the other hand this is not the case costco is growing in earnings consistently almost every year so i like to see the growth of this company however the company has to grow dramatically in earnings in order to essentially justify the current trading value of the stock we can see that the company’s price difference is at about 40 which is really high for a company in general this is even high for a tech company 10 companies can have maybe a price variance of 20 at the most in order to be this sort of justifiable and i would invest in the company with the price during the 40 if i could basically determine that the stock was going to be able to grow its earnings by maybe three times in the next year to a maybe a new invention or a new law that’s getting passed or something like that unfortunately this is not the case for costco although the earnings have been growing the price of the stock has grown at a much faster rate and therefore the company’s price earnings has grown consistently as well so i don’t see this company as being a stock that’s going to outperform the market in the long term in fact i think if you really want to be invested in costco a little bit but not necessarily be paying the price that it is at this point because the price tag is really high you could actually just buy into maybe a big index like the nasdaq 100 or maybe even the s p 500 which both contain a stake in costco wholesale so this will allow you to hold a position in costco wholesale while also not necessarily spending the high price during stats at the moment now really in my opinion if you’re trying to invest in costco itself you’re not really trying to buy all these stocks that are listed in the nasdaq 100 or maybe even the s pa 500 the real point is that costco has too high of a price tariffs to make this a really justifiable investment at this point but it’s likely that the company will go through some sort of correction in the future and therefore the company will actually be quite a bit cheaper and hopefully trade at a price targets below 20 so you can justify buying it to the stock at a fair value now there’s just a few more things i’d like to talk about in our videos and this would be of course the stock buybacks of the company you can see that they were willing to repurchase about four billion dollars worth of their stock in 2019 now this was a stock repurchase program that they authorized and the deal with this is this doesn’t mean that the company has to actually buy back their own stock they used to buy back their own stock quite a bit and this is really back in about 2007 2008 so they spent a lot of money to repurchase their own stock back then but now they have decided to not be willing to repurchase much of their stock at this point so they may be authorizing more share repurchase programs but it seems like they’re just trying to pay out a small dividend of their earnings and then essentially not do very much in terms of buying back their own stock at this point this means that they themselves think that the stock is likely overvalued and that they’re going to wait a little bit before they buy back their own stock when a company buys back their own stock it’s because they likely think it’s undervalued and they think that’s going to be a better benefit to the shareholders if they buy back their own stock rather than just give them a dividend so therefore i think that if we take a look at the dividend of this company we can know as well that the company’s dividend yield is also only at about point seven percent so that is really low for a grocery store business and this is really because the company just trades really high so with a price savings of about 40 the company really just can’t afford to pay a very high dividend yield at the current trading value so therefore this company is not going to offer a very good demand yield so it’s not very good to ban stock in my opinion this company will be able to likely afford this demand for many years to come however there seems to be many other stocks with with much very demand yields in the telecom industry and also the banking industry as well so i would rather look into those kind of stocks if i’m interested in dividend income if you’re looking for growth this company seems to be a very strong growth stock however at the company’s current trading value from a value investor’s perspective i see this company as being overvalued and so i would not be interested investing in this company at this point for me i’m going to wait until the stock trades below a price tag of 20 before i consider investing the stock so hopefully you enjoyed this video and hopefully you learned something if you like this video please do like subscribe it’s about our channel and please come down below and tell us what you think about this company we’ll try to get back to you anyway thanks again for watching and don’t forget everybody.