Wednesday, February 5, 2014

Why Costco is a Winning Stock

This video shows Motley Fool's analysis of why Costco is a good buy:

According to these stock experts, the membership fee is a major revenue generator. I think this mathematical analysis is over-simplified but interesting. As pointed out in the comments below the video, memberships are not pure profit, but have an operating cost that should be considered. Also, I remember hearing on a Costco earnings call that 80% of sales at Costco are by Executive Members who get 2% cash back on purchases. I get enough money back to pay for several of the $55 memberships, so the math on the analysis in the video is too simple. 

That said, I would love to see a more detailed and accurate analysis of the profitability of the memberships.  I wonder what percent of people get cash back?


Costco's Cash Conversion Cycle


The analyst makes a point new to me about Costco's cash conversion cycle, which is the time it takes for inventory to turn into cash.  According to the video, 30 days would be considered average or good for most retail.  WalMart's is 2 weeks, but Costco's is 4 days. Amazon, the analyst notes, can even have a negative cash conversion cycle.

I do not own Costco stock and am not knowledgeable in the stock market, so please don't buy or sell Costco stock based on anything I say without lots more research.

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