Costco: It Pays to Be Involved!

By Sabina Bhatia  NOV 28, 2012 1:32 PM

If you're looking for high-growth companies, this stock is worth your radar screen.

 


MINYANVILLE ORIGINAL Costco (NASDAQ:COST) stock is trading around $100.93 versus its 52-week high of $104.43. The stock trades with a price/earnings ("P/E") multiple of 22 times, and a forward P/E of 20 times.  The stock yields 1.1%. The company has shown strong growth in EBIT margin from 2.5% in 2009 to 2.8% in 2012. Leverage has remained stable at 2.2 times. Net interest coverage continues to improve with 32 times in 2009, and 44 times in 2011. Free cash flow has improved significantly from $850 million in 2009 to $1.7 billion in 2012. Here is a company that has continued to improve its fundamentals through tough economic times, and returns (some) cash to shareholders.

This morning, the company reported November same-store sales (SSS), which was up 6%. International sales were up 7% while US sales were up 6%. If we take into consideration both FX, and gas inflation, core comp was up 5.4%. Total sales were reported as $8.15 billion, up 9%, and Q1-2013 sales came in as $23.21 billion, up 10% over last year.
 
The bigger surprise this morning was the $7 special dividend announced by the company. The company has an investment grade balance sheet, but has not been very aggressive in returning cash to shareholders, which is why the $7 special dividend was a surprise to investors, and has provided for an upside in the stock this morning.

Another point to note is that the company recently filed an automatic shelf registration in order to issue debt. This morning, the company announced that it plans to issue $3.5 billion in senior debt with a possible rating of “A-“ Initial price talk for the security is up 40bps for the 3-year tranche, up 50/55 bps for the 5-year tranche, and up 70/75 bps for the 7-year tranche. A successful pricing of this debt will help add a liquidity cushion to the company’s balance sheet. This is more relevant today since the company announced the special dividend.

The company does have a strong balance sheet, which as of FY2012, consists of $3.5 billion in cash and cash equivalents, and short-term investments of $1.4 billion. The company has long-term debt of $1.7 billion, but only $197 million is due through 2015. The largest contractual obligation for the company is $6.6 billion in purchase obligations, which is typical for a big-box retailer such as Costco, and does not present a risk for a company such as Costco.
 
In addition to liquidity on the balance sheet, Costco has $438 million in available borrowing capacity on its bank credit facility. I am in favor of the “use of proceeds” language stated on the credit facility, which allows the borrowings to be used for both working capital, and general corporate purposes. This allows the company to use the capacity on the borrowing facility for day-to-day operations of the business, and to pay down debt. Additionally, the company has been a strong generator of free cash flow, with $1.7 billion generated during FY2012.
 
November sales for Costco have been strong. It is important to track the performance of top line growth during the holiday season. For those looking for high-growth companies, this stock is worth your radar screen.
No positions in stocks mentioned.