Down 13% Year to Date, This Company’s Business Model Is Recession-Proof
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The S&P 500 rallied 93% from April 1, 2020 through the end of 2021, but since the start of the new year, stocks have been underwater. The index has sunk 20% year to date in the wake of the Federal Reserve’s interest rate hikes to buck record-high inflation levels. As a result, many investors are starting to fear that the aggressive monetary policy is going to pull us into a recession.
With financial markets likely to fluctuate for the foreseeable future, investors should turn to businesses that are poised to succeed irrespective of the macro environment. Costco Wholesale (NASDAQ: COST) is just such a company. The membership-only retailer has rewarded long-term shareholders wonderfully over the years, generating a total return of 579% in the past decade.
As uncertainty continues to weigh upon the global economy, let’s examine why Costco could be a wise investment right now.
Image source: Getty Images.
Consistency is engrained in Costco’s business model
The membership-only retail titan experienced a strong outing in the third quarter of its fiscal 2022. Sales climbed 16.3% year over year to $51.6 billion, and earnings per share rose 10.5% to finish at $3.04. Its operating margin declined 28 basis points to 3.5%, and its net profit margin dropped 13 basis points to 2.6%. But membership fees grew 9.2% to $984 million, displaying the retailer’s ability to maintain and attract new customers to its warehouses.
While membership fees only represented 1.9% of the company’s top line in the third quarter, they accounted for 73% of total net profits. Costco’s membership model is the determining factor of the company’s success. Boasting a renewal rate of 92.3% in the U.S. and Canada, it currently costs just $60 annually for a standard Gold Star Membership, making it painless to attract new customers compared to most subscription-based businesses.
The company’s blue-ribbon customer retention makes for an extremely durable business, allowing investors to more easily predict its operational performance over time. Combined with its cut-rate prices, which may lure more customers in an unsettled economy, Costco appears to be well-insulated from ongoing macro headwinds.
For the full year, Wall Street analysts project the company’s top line to increase 15.1% year over year to $225.5 billion, and its earnings per share to surge 17.6% to $13.04. These are robust growth rates for a jumbled economy, but better yet, the stock has pulled back 13.1% year to date, causing its price-to-earnings multiple of 38.8 to inch closer to its five-year mean of 36.2.
Expect more success for Costco in the future
There’s no doubt in my mind that Costco will sustain its healthy operational performance in the years to come. Given today’s economic backdrop, which is overwhelmed by high inflation, rising interest rates, and the war in Ukraine, Costco should be a shoo-in for investors looking to capitalize on the company’s recession-proof business model.
As such, I feel comfortable with the stock at current valuation levels; however, prudent investors might do well to wait until its price-to-earnings multiple slumps below its five-year mean. At that point, it’ll be “go time” to buy the world-leading retail giant.
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Luke Meindl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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