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COST stock could rise 30% if its free cash flow remains strong


  • Costco (COST) is down more than 13% year-to-date (YTD), but could rise significantly from here due to its huge sales growth.
  • Costco’s April sales were up 13.9% year-on-year (YoY), with U.S. sales up 13.8% year-on-year on a like-for-like basis.
  • Investors should consider buying Costco stock as its strong free cash flow could send it up 25%.

Source: Helen89 / Shutterstock.com

May 4, Costco (NASDAQ:COST) reported that its April monthly sales rose 13.9% year-on-year after rising 17.1% the previous month. Additionally, on a comp basis, its US sales were up 13.8% year-over-year. This should mean good things for COST stock.

The company will likely release its results for the quarter ending May during the first week of June. Currently, 24 analysts estimate revenue will hit $51.4 billion, up from $50.94 billion last quarter.

Additionally, as it stands, these analysts forecast earnings per share (EPS) for the year ending August 31 at $13.14 and up to $14.47 next year. So, at today’s price below $500 ($490.47 at yesterday’s close), COST shares are trading 36 times this year and 33.9 times next year’s EPS.

These are not cheap multiples. However, it may be more interesting to look at the company’s valuation from a free cash flow (FCF) perspective.

Costco estimates for the future

Analysts forecast Costco’s sales to reach $223 billion for its fiscal year ending mid-August 2022. That’s a potential increase of 13.8% on an annual basis from $195.93 billion the last year.

However, with these latest figures, analysts could raise their estimates. This will be especially true if sales this summer continue to increase at such high rates.

For one thing, high inflation can start to have a stockpiling effect, where people stock up on basic items now because they expect prices to be even higher soon. This has the effect of advancing future sales. But in the short term, it’s accelerating year-over-year sales growth. Costco, a major big-ticket warehouse and big-ticket outlet, is perfectly positioned to take advantage of people scared off by rising prices.

After all, the price levels are very high. The Department of Labor last reported on May 11 that the Consumer Price Index (CPI), which measures inflation, rose 8.3% in April over the past 12 months (LTM) . The previous month’s LTM inflation was 8.5% and 7.9% the previous month. In other words, the price levels are high. This could be one of the main reasons why Costco sales are growing 13% to 17% per month on an annual basis.

Based on the company’s latest cash flow statement, its free cash flow (FCF) was $1.881 billion for the quarter ending Feb. 13. This represents 1.84% of its $102.3 billion in sales.

So, assuming its FCF margin hits 1.9% of its $223 billion sales forecast, FCF should reach $4.24 billion this year. We can use it to evaluate COST stock.

Where does that leave the stock COST

We can value COST stock using an FCF yield of around 1.5%. This is equivalent to multiplying $4.24 billion in FCF by 66.7, since 1 divided by 1.5% equals 66.67x.

This means that Costco’s target market capitalization is $282.8 billion. That’s 30.7% more than Costco’s market value today of $216.37 billion.

Therefore, COST stock has a target value of 30.7% from its current price of $490.47. This puts its value at $641.04. This is a very good return for most investors.

Analysts are not so bullish on COST stocks. The average of the 19 analysts interviewed by TipRanks is $612.26, which is 25% above today’s price. This is also what the Refinitiv the survey also indicates this. Their survey of 29 analysts is $591.83 or 21% above today’s price.

Last month, analysts had lower price targets, as you can see in my previous article. So they are also increasing their view on COST stocks, closer to my target of $640.28, or 31% higher.

As of the date of publication, Mark Hake did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

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