Costco’s Third-Quarter Margin Lower Than Expected, but Its Strengths Remain; Shares Trade Fairly

Our $471 per share fair value estimate should not change much after wide-moat Costco posted third-quarter earnings (similar to the after-hours trading reaction to the news), with a time value of money-related adjustment offsetting the impact of lower-than-expected profitability (3.4% operating margin versus our 3.9% forecast). About half of the difference was attributable to the firm awarding employees an extra holiday, with the remainder coming from cost pressure as Costco balances profitability with membership value. Our long-term forecast calls for mid- to high-single-digit annual percentage revenue growth and 4% operating margins over the next decade. With the shares trading near their valuation, we suggest investors seek more of a margin of safety.