Costco: A Wonderful Business at the Wrong Price
The business and its moat
It is tempting to file Costco under “retailer.” That would be a mistake. The better description is a membership infrastructure that charges 68.3 million households worldwide an annual toll and, in return, keeps delivering the lowest prices available.
The mechanics are unusual. Management caps gross margin on merchandise at 11–14% by its own hand, which means nearly all profit arrives via the membership fee. That fee was raised from $60 to $65 in September 2024, and the renewal rate in the US and Canada held at 92.2%. A business that raises prices and retains its customers anyway is not begging; it is collecting rent. AI and automation, meanwhile, work on the right side of the ledger here — optimizing logistics and inventory and deepening the cost advantage rather than threatening it.
Earning power and capital allocation
Five-year average ROE is 28.2%, with a standard deviation of just 2.2%. That stability comes from a fee-like recurring income stream, not from riding the economic cycle.
Conservatively, owner earnings run around $8.5 billion annually — FY2025 net income and operating cash flow, less capital spending, though most of that capital spending funds the 25–35 new warehouses opened each year and is therefore growth investment, not maintenance. Strip out only the true upkeep, and the underlying earning power is considerably higher than the headline cash flow suggests.
Capital returns are disciplined and unglamorous: 22 consecutive years of dividend increases, six special dividends since 2012 (most recently $12 per share in January 2026, roughly $5.3 billion in total), zero empire-building M&A, and buybacks held to about $0.9 billion in the latest fiscal year. Restraining repurchases at these prices is management quietly admitting the stock is expensive. That candor is worth something.
Valuation and margin of safety
Here the story turns. The market cap stands at $419.3 billion — a share price of $945.47 at 46.9 times earnings. Wall Street’s 35 analysts carry a consensus BUY with a $1,077.31 average target.
Our approach differs. Applying 15–20x to $8.5 billion in owner earnings — a premium warranted only by the quality of the business — yields an intrinsic value of $128–170 billion, or $290–385 per share. With a 30% margin of safety, the buy zone is $90–120 billion, or $200–270 per share.
At $419.3 billion, the market sits 2.5 times above even the top of that range — a 146% premium. The owner earnings yield of 2.03% fails to reach half of the 4.72% offered by the 10-year US Treasury. The analyst target simply assumes 46x earnings persists; that is a bet on multiple, not on the business.
In other words, the margin of safety is not zero. It is negative.
Word for today
A great company and a great investment are different things. The former is made by management; the latter is made by the price.
Costco’s warehouses sell things more cheaply than anywhere on earth. Its shares, it seems, are the exception.
Verdict
Pass. Admirable business, unadmirable price.
Correction (2026-09-03): market cap and owner-earnings yield restated at the price on the verdict date ($943.96 on 2026-08-28; the 2026-08-24 screening snapshot adjusted for price): market cap ≈ $415.3 billion (the article said $419.3 billion), owner-earnings yield ≈ 1.21% (the article said 2.0%) vs the 10-year Treasury at 4.67% — verdict unchanged.
This analysis is AI-generated, educational, and not investment advice. Figures may contain errors or be delayed. Disclaimer