Costco Wholesale Corporation (COST): This Retailer Is a Bit Too Expensive

Trading at a premium

In fiscal 2012 Costco Wholesale Corporation (NASDAQ:COST) recorded EPS of $3.89 per share, and the average analyst estimates for fiscal 2013 and 2014 are $4.55 and $5.05 respectively. The stock trades at about $112, putting the current P/E ratio at 28.8, the 2013 P/E ratio at 24.6, and the 2014 P/E ratio at 22.2.

It’s hard to buy Costco at these prices. I don’t doubt that earnings growth will be strong, but compared to other retailers there’s quite a premium here. Wal-mart trades at just 15 times last years earnings, while Target trades at a slightly higher 15.4 ratio.

Of course, there’s good reason why Costco should trade at a higher ratio than its competitors. Wal-mart recently missed analyst estimates for its most recent quarter, showing revenue growth of 1% and net income growth of 1.1% year-over-year. Target Corporation (NYSE:TGT) did even worse, with revenue dropping by 1% and a small drop in adjusted EPS. Costco, on the other hand, grew revenue, members, and profits considerably.

Is Costco’s price reasonable? I like PEG ratios to be around 1 for fast-growing companies, and Costco is not quite there. Analysts are assuming 17% EPS growth in 2013 and 11% EPS growth in 2014, and using the highest of these numbers and the 2013 P/E ratio the PEG ratio is somewhere around 1.45. It’s not outrageous, but it’s higher then I’d like.

The bottom line

I won’t be buying Costco Wholesale Corporation (NASDAQ:COST) at the current price. It’s a great company which will likely see strong growth for the foreseeable future, but I think that the stock has gotten a bit ahead of itself. How big can Costco get? How many people are willing to pay for a membership? Costco currently has around 67 million card holders. It seems like there should be a hard limit somewhere, and the question is at what point will Costco saturate the domestic market? This may be a long ways off, but it’s something to think about.

The article This Retailer Is a Bit Too Expensive originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale (NASDAQ:COST). The Motley Fool owns shares of Costco Wholesale. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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