A year ago, I made a video called. This is the best company in the world. It's a pretty bold statement to make, but I felt strongly that this company is one of if not the best companies in the world and the company in question is Costco the warehouse giant the video went over an overview of what Costco actually is Costco is not a simple retail company that sells stuff.
It's a warehouse company. That buys things on behalf of its membership, they have rows of giant pallets of merchandise, Cosco's able to undercut pricing of every competitor, by buying things. And Of quantities, having very few employees per warehouse and they can offer substantial discounts to their members. I also went over the fact that
they are a real estate company. They own a ton of land and their land is premium real estate, typically in the middle of highly populated high-income cities. And I also went over the membership model, Costco's, not just a simple retailer, they are a membership there, a club, they are a subscription company with reoccurring, high-margin Revenue, Costco's, one of those companies, it seems very plain.
Very Area on the surface, but as far more complex, and their advantages are far more nuanced, the more you dive into the company. Now, like I mentioned in the title of this video, not only do I talk about Costco and do research on the company. But I've actually made pretty big investments into the company in my passive income portfolio that I track publicly every single week, I have a category of investments called consumer within that category.
I have Costco. This is a holding that I have five thousand four hundred dollars of gains in and have thirty six thousand dollars total invested in this company. Any. Now, the interesting thing about this company is when I started buying it, Costco's one of the OG Holdings. It's one of the originals by go to my activity, history of my brokerage and look at my very first purchases of Costco. The very first ones I've ever done there in December 18th of 2017.
December 19th, December 20th, December 21st. I was buying this company over and over again in late, 2017 and early. 2018. The buys at that time, period, we're at a price of a On $186 186 Cosco currently trades at a price of $487? That means that since early 2018 Costco has appreciated in stock price by 160% 160 percent in just capital gains. And this company has paid dividends every single quarter of the way.
So the returns of my initial investments in the Costco have been phenomenal, the rate of return When I was first buying Costco, in 2018 has out, Outpaced the S&P 500 by over double compounding at 22 percent compared to the S&P 500's 9.7%. And since those initial purchases back in 2018, I've been adding to this position buying more and more of Costco virtually any time, the company dips any time, the price goes down temporarily, I buy more of it and that's what I want to
talk about. Today is Costco still the great investment that it was five years ago. So obviously we have a lot to get to in this episode. Let's go ahead and Jump Right In. And before we talk about Costco specifically, and I dive into my thoughts on the company, their most recent earnings report and what I plan on doing in the future with them, I want to just do a quick review of My overall strategy because Costco, only
makes sense. If you actually look at my overall investing strategy, what we're looking at is the passive income portfolio. This is my primary investment vehicle. This is where I'm trying to grow wealth as fast as possible. I've developed a strategy where I'm investing in companies that I consider to be compounding machines. These These aren't your average
companies. These ones are typically monopolies and highly concentrated Industries with high barriers of Entry. Their companies have significant growth significant pricing power. I invest in these companies and I make concentrated positions into the ones that I think are the best companies over time as I've developed. And optimize the strategy. My portfolio has become more and more concentrated and I can throw up on the screen. My core Holdings.
These are my nine core positions, currently, Lee. I have nine positions that make up over 80% of my money invested, these nine companies are it. This is the passive income portfolio. This is 80% of the invested Capital. Most of these positions are over 10 percent of the portfolio when I look at it I organized it from left to right from my oldest positions, the ogs all the way over to the newer ones that I've welcome to the portfolio as new concentrated positions.
At the very left we have apple. This is a company that's widely, outperform the market. Good. I mean the green right now, by sixteen thousand dollars. This one is done. Terrific. After Apple, we have Microsoft. That's one of the only original companies that I'm currently in the red on and it's one of the ones where I think it's heavily undervalued. In my opinion, I'll be in the red of Microsoft for short
amount of time. After that, of course we have CostCo. Then we have Vici another company that I invested in around two years ago when I'm in the green twelve thousand dollars in that one, then we have Texas Roadhouse. This is another one that I invested in around two years ago. In the green. 8600 after that, we have for new companies, SP Global, MasterCard, Canadian Pacific and Union Pacific.
The railroads combined make up about 10% and then I have over 10 percent in Sp Global and MasterCard. Now, the performance of them are all around flat. I put new because these are ones that I invested in this year. There are new core Holdings and I think we're going to see the same thing over time. I think we'll see the intrinsic value increased and these companies compound as well, but
this is the portfolio. As of now, these are my concentrated core positions, each one of them is incredibly meaningful to the Future performance of my portfolio and basically my strategy is very simple, whatever one of these companies in a dip that's where my future cash flow. That's where my reinvested dividends go. I reinvest back into whatever company is going through the
biggest dip. Now, if you want to follow along and see how this turns out, see how this strategy evolves and performs over time, I'm also tracking my I'll be showing you compared to the S&P 500. How this works out. Now let's go ahead and jump into Costco, like I said, this is a company that I've owned for years. I've owned it for over five years now.
And my initial purchases of the company are up 160 percent, but Ivan, adding to this position, every single year, anytime the company dips, I've been buying more right now. I'm in the green by around five thousand four hundred dollars. So for me with my inflows of cash, this is Been a widely Market outperforming company and a lot of investors are wondering if now's a good time to get into Costco. So let's go ahead and take a look at that.
We can use quantum.com. This is a website that I've developed its included as part of the patreon membership, $10 a month with a free trial, try it out with a patreon link in the description below. If we look at the price of Costco, over the past six months, it's down 8% and that's a typical of this compound and Company. It typically doesn't go down for six months at a time. If we go to Past year, it's down, eight percent over the
past year. Another thing that's not typical for this, compound, and Company now granted, this isn't too bad compared against the S&P 500, but Costco has showed a little weakness. Nonetheless, when we look over two years it's up 56% in. This is the type of thing. You see with Costco over small periods of time. It can look like the company's going through trouble over any longer period of time. It is a compounding monster. Now, let's go back to the The two year time Horizon here.
If I look at this, we see it just zigging and zagging. The price went up to five seventy, then down to 470, then back up to $600, then back to $400, then back up to 550, then down to 450 then back up to 500, then back to 450 so on and so forth. Now, I'm sure there's some technical analysis on this. I'm sure some people will be drawing more lines and saying how it's going to go up or down based on this. That's a question for You can still look at, which is not my specialty.
I invest in these companies based off their intrinsic, fundamental value. And before we jump into the valuation, I want to look at some of the fundamentals and see what's been going on with the company over the past couple of years. So, let's start off looking at the fundamentals with the revenue chart. The top line, revenue growth, or sales growth of the company is astronomical. And this is something that I think Costco does not get enough credit for it.
You see companies like a zoom or even companies like Apple and Google and meta and everyone talks about Those type of tech companies. As being growth companies, Costco has grown faster than all of those companies over the past year and over the past 10 years and 20 years it's been a growth monster. We have the numbers all the way back to 1985 since then the growth is steady, consistent and fast. This is a Growth Company,
there's no other way around. It Costco grew its Revenue by 15% year over year over the past five years. Grown at 12%, it goes through times where it slows down a little bit if the economy slows down but it's actually less cyclic called than the General market. So, even during time periods, like the Great Recession in 2009, Costco's sales went down a tiny amount. It barely stayed flat and the.com, bubble Costco, sales
grew. So this company is a fantastic Growth Company. It still grows today and the growth has actually picked up and Pace over the past year. Now, when I purchase Costco, back in 2017, That was right here. So here's 2017. This is the year that I made the first purchase of it since 2017. We actually look at the number here. They did 129 billion dollars that year since then they've increased from 129 billion to 226 billion. So 129 2226 they've around doubled the amount of Revenue
over the past five years. So again, I bought this retail company that was already really. Big and lots of people sing. The growth was saturated. Costco is a slower-moving company and the revenue has doubled over the past five years. That's pretty quick growth. And keep in mind that they grew the revenue. This quickly organically, they haven't done major Acquisitions, they haven't been diluting shareholders to buy company. After company, this is just Costco, just the warehouse.
That's the only way that they're growing is through their warehouse and through their online sales, they are not buying up companies doing terrible. Acquisitions at high prices to grow their top line revenue. This is all organic growth, which makes it even more meaningful. Now, next we look at the actually, but of the company importantly, Costco, converts their revenue, growth to even faster, ibadah growth.
So you see these numbers are actually faster Pace than the actual Revenue. Next up, we have the free cash flow of the company. When you looking at free cash flow, this number is the amount of operating income the company. Generates subtracting out, the capex of the company. The capex is the amount of Money they spend on building new warehouses, buying new shipping trucks. So if they stopped building new warehouses, that free cash flow
would go up as a result. Now, we look at this and we see that over the past five or six years. They went from a level of around 2 billion and they've doubled that to around 4 billion that's the level that they're at. So they've doubled the amount of free cash flow over the past five to six years. In my opinion, I think the free cash flow will continue to grow at an even accelerated pace. And I'll Plane that more in the future.
But I actually think that the free cash flow is going to be six to eight billion dollars over the next five years. Now, we can factor in stock based compensation. This is the amount of money that they dilute shareholders to pay their employee in stock from a shareholder perspective. It does not matter what you pay your employee, it's all value lost for the shareholder value, transferred from the shareholder
to the employees. So whether they pay in cash, or they pay in stock, that is money, going from the shareholder to the employee. This case, I think they're stock-based Compass completely reasonable. So I think their free cash flow profile overall looks very good. Now we look at the net income of the company, this is another way of measuring the profitability of the company, but this also brings in and expenses and it's a different way of accounting for it than the cash flow statement.
When we look at the net income, we see that Costco's one of the companies where the actual profitability of the company grows faster than their top line revenue. For example the net income over the past five years has grown at 17 percent over the past 10 years. It's grown at 13 percent that is outpacing. Its total revenue growth. So they have a very good conversion of Revenue to profitability and then finally we look at the earnings per share.
This is of course the metric every investors looking at during the earnings time how much was their earnings per share? Costco's a company that again. You look at these charts and it's just phenomenal. Every single chart is as if you went in and just drew lines of the perfect company, everyone, Them is up and to the right every single chart shows a consistent very predictable,
intrinsic compounding. The intrinsic value of this company increases every single year marching higher and higher every single year. And importantly, another thing to mention with the earnings per share of this company and a lot of things that I think newer investors miss when they're looking at new Investments is it's not just about how quickly a company can grow its earnings per share. That's not the most important measurement.
The most important measurement is how Consistently and quickly a company can grow its earnings per share. Consistently is more important than how quickly for example, if we compare this earnings per share chart to a company, like AMD, that's another company that's considered a Growth Company. One growing much faster than Costco, right? What we look at that earnings per share chart, and this is what it looks like.
Now, if you just erased history and you didn't study any of the history of the company and you're focused on maybe just a past couple of years. Here's your new investor that started investing in the past four years. This is what it looks like. Wow, this company grew its earnings per share by 10x over the past year.
That's amazing. You might be really happy right here, but what you miss out if you're zoomed in on just the most recent years is studying the history of the company and knowing what you're invested in, AMD has a long history of being a highly cyclical company, with unpredictable earnings, That Swing negative, and positive over time. Time. So even though the earnings growth was fantastic from 2018 to 2020, look how short live.
That was now the earnings per share are going back down and 2022. And this follows the long-term history, someone were looking at companies, it is important to have their 20-year history. This can better inform your decisions of future Investments when I'm looking at Costco and assessing the intrinsic value. I know that the company is increasing its intrinsic value over time because it doesn't give up its game. It makes gains and then it keeps
them at worst. It might stay flat for a year that's acceptable, what's not acceptable as the company being completely unpredictable. And that's something that you do not get with Costco. Now, of course, after looking at the organic growth and their revenue, the incredibly fast growth and ibadah free cash flow. Net income and earnings per share this company so far, looks like an overall growth monster. That's what we're looking at a
compounding machine. Every single metric Every single proxy that you can measure the growth of a company. Costco has it and they pass this test with flying colors. This is a company with a long robust history of provable growth after that, we look at the health of the company and we do that by assessing the current balance sheet.
Now looking at the balance sheet, this is another scenario where I like to look at the long-term history of the company, the both gauge the decisions that the management has made and if the company likes to lever up and debt or if they like to keep a lot of cash, what type of company? Is this when I look at Costco, I look at the cache verse that debt over time. And I notice that, basically, at all times starting from 2002, the cash is higher than the
dead. Don't you notice that when you look at it, the green is the cash. And the red is the debt since 2002. The cash has always been higher than the dead before that you had more debt than cash. So this was in the very early stages of the company. They probably had some investment money they had. Add a little bit of debt and as soon as the company became very profitable they said no more. We're going to run this company very conservatively, and that is
a deliberate decision. Look how many companies do not run this way, they run with more debt than cash. Now, even when we factor in their Capital lease obligations, which is another form of obligation. It's kind of another form of debt, but it's not exactly the same as long-term debt. Even when we factor that in, they still have more cash than debt. This is a completely unindicted company unlevered, which tells
me a bit of information. First of all, companies that have zero dollars in debt, are simply less risky than companies that have dead that is just the first. Take away all else. Equal a company that has less debt is far less risky than a one that doesn't. So when I look at Costco, that's a big positive. I know that this company and the management of it are not taking risks with their financial situation. They're not taking risks with their It's sheet and a lot of
companies. Again, they do take risks, they like to take out debt. I can give you a for instance. Let's go ahead and take a look at Domino's by comparison. This is a company that has a great business model. Domino's is a fantastic business as a franchise food, operator, But Domino's has a different Capital, allocation strategy. This is a different decision by management, they do things. In fact, the exact opposite of Costco, they always have a lot
more debt than cash. I can barely even see the amount of cash they have. And one thing that they've decided to do over the past seven or eight years is to increase the amount of debt every single year and use that money to buy back shares. So they're taking out debt. And they're using that cash to do levered BuyBacks. Why does Domino's management do that? Because it makes the earnings per share grow at a faster rate.
So, this is a form of, I think, decent Financial Engineering the company taking out debt at a very low interest rate to buy back shares at a very cheap price, which increases the earnings per share and overall increases the value to the
shareholder. But the consequence of this action is that after you've done that for a long period of time and the environment changes where we have higher interest rates and now to take out new debt or renew the debt, you have, you're doing it at a much higher cost of capital. So, Domino's is not going to be able to do this same thing perpetually and now they're in a situation Somewhere they have currently, around five billion dollars of debt, they have 60
million dollars in cash. And the five billion dollars of debt is around five to six times what they made in ibadah in 2022. So this would take them at minimum, five years to pay off that debt. This is a company, that's highly levered. And again when we bring back up, Costco, and we look at the balance sheet here, management could do the same thing, they could easily take out. Out billions and billions of dollars in debt Costco's very credit worthy.
They simply won't do it. The management does not care about short-term gains with the company and they're certainly never going to put the company in financial Jeopardy by manufacturing, short term gains. And this again is a trade-off. You can probably find companies that you'll get better short-term results. But it's difficult to beat this strategy long-term, because when you reduce risk, you reduce the long-term chance of this company ever running into trouble.
Some we look at the Balance sheet and we put that in contrast with the rest of the company's growth, I think it makes it all the more impressive not only are they growing their revenue but they're growing. It organically without doing major Acquisitions, lots of companies can bump up the revenue like Disney did by buying major assets like the fox deal, but when they do that, they have to pay a price. They take out a lot of debt. They issue a lot of shares.
In the case of Costco, all of this growth is organic. Now, if we look at how this company returns cash, Back to the shareholder. We can look at the dividends and the share BuyBacks. Let's go ahead and first start off with the dividends. This charts thrown off a little bit by two major dividends. These are special dividends here, five dollars in 2013 or 2014. And then we have another seven dollar special dividend in 2017. They do this surround every five or six years.
If Costco gets too much cash and they don't have much to do with it, they're going to return it back to the shareholder. Either through, share BuyBacks or Evidence. And in my opinion, I think we could see another special dividend in 2023 or 2024. Now if we look at this without those special dividends this is what the dividend history looks like. It's very impressive. They grow at around 10 to 12 percent per year, they've done.
So for the past 20 years, another way a company can return money back to the shareholder is through share BuyBacks. This is a point that I don't like about Costco. A lot of the companies that I'm investing in do, very aggressive, share, BuyBacks by reducing the amount of Shares outstanding that increases your ownership in the company Costco really has not done that for a long period of time.
Since around 2006, the share count has remained mostly flat, very flattish which means they're just buying back enough shares to pay their stock based compensation. So they're making it so that they're not diluting you but they're also not increasing your interest in the business by reducing the amount of shares outstanding overall. I like the capital return policy of the company paying out dividends every single quarter and then giving you Very lofty.
Big special dividends when they have too much cash. And in the meantime they're not deluding you because they buy back just enough shares to offset dilution. I think overall it's a very smart way to return Capital back to the shareholder. The next thing that I look at is the actual ratios of the company. The return on Capital employed. This is very similar to the return on invested capital and another similar metric. That Warren Buffett looks at which is Returns on tangible
assets. Basically, you're looking at how effective the company is at using the money that it has, Costco is very consistent like everything else in this business. It is consistent. The Returns on Capital employed are not the highest of any company. There's other ones that have much higher are oce, but Costco's are decent there in these 17 to 25 percent range and they're incredibly consistent and they're continuing to grow over time as a company, has
become more optimized. Now, finally, the last thing that I'd look at with Costco is the expenses of the Company. They don't have much General, administrative research and development. They don't have any sales and marketing but they do have capex to build new warehouses. You can see the capex going up over time as they spend an increasing amount of money building, 20 to 25 new warehouses per year. What I'll say about this is, there's a misconception going on with different companies, like
Costco and their future growth. A lot of people think that there's already a lot of Costco's in the US. So when they eventually hit saturation and they have no more warehouses to build in the US because they're already super saturated. That means that the company won't grow anymore. What are they going to do?
That is a misconception. That's not an accurate way of looking at it. Even when Costco hits saturation of having too many warehouses in the u.s., I think the revenue will continue to grow at the exact same rate and I have an example of this same thing happening. We can look at the actual store count of a company Like Home Depot in 2011, Home Depot. At 1974 locations in the US in 2021 a full decade later, they had 2006 locations. Again, that's going from 1974 to 2006.
So they opened up around 30 to 40 new locations in a 10-year period. It's almost nothing. That's like an increase of a couple percentage points there. The store count of Home Depot has remained flat over the past. Decade, but we can look at Home. Depot's Revenue over the past decade, and let's just take a glance here. This is from 2011. To current day, the revenue has gone from seventy billion dollars to a hundred and sixty
billion dollars. With basically zero news stores added, they grew their revenue by double. In fact, it's been one of the best growth decades for Home Depot. So, keep that in mind. When people say, what happens when Costco's saturated with, in the US, the company will cease to grow. That's not accurate. The company has many levers of growth. And opening up a new stores is
just one lever of growth. Now, even if the company becomes saturated in the u.s., one of the great things about Costco, that hasn't been the case with many other retailers is Costco, is beloved by basically every other country and every other culture, whether it's Japan, whether it's all of Europe, whether it's even China, China is one of the new growth pass for Costco. They've already opened up a couple new locations and they're basically flooded with people
all the time. The amount of members they have our Around five times the average of a location in the u.s. Costco assesses that. Their demand is so immense that could basically open up hundreds of new locations in China and have all of them have more membership than current u.s. locations. So this is a company that has endless amounts of growth with its locations all across the globe and it's one. That's also very unpalatable Costco's. Not a company that gets in a lot of trouble.
It's a very mundane company, so it's not one that I think would get in the midst of us and China. Relationship. It's a company that stays very low-key, so Costco does have a lot of store growth ahead of it. I think they're going to continue to open up 20 to 25 new locations per year for the long-term foreseeable future. But even if they didn't, even if Costco never opened up, a new location again, I still believe it would remain one of the best
growth companies in the market. Here's a chart that Costco puts together on their 10K, this is their annual report. You have to dig down way deep into the report to find this information but they show her is a number of locations that they opened up every single year and then the average revenue, the average sale per Warehouse from that location by year. For example, we can go all the way back to 2014 in 2014. Costco opened up 30 warehouses so, 30, new locations and 2014.
And on average, they averaged 108 million dollars in sales per location. So 108 the first year that they opened in 2014. We can track those same 30 locations. The same 30 are now doing on average 208 million in sales in 2022. So in less than one decade, those locations. In 2014 have around doubled, their average revenue per location. So, not only does Costco grow its Revenue by opening up additional locations but every single location opened in any single year.
Over the past 20 years grows. Its average revenue every year. So overall so far, I think this company is very well positioned to continue growing very quickly. I think the growth will be much faster than a lot of the tech names and a lot of the growth companies that get talked about online. All the time, the big question that remains is the company at a price that allows us to buy in
and get a decent return. And that is often the most difficult question regarding Costco, most people know the company's decent they They think the company's pretty great. Most people in the u.s. at least shop at Costco. But the question of price, always remains the biggest
question. So, let me share some thoughts on how I view the current price in the current multiple of Costco. The P/E ratio trailing is 35, and the forward P/E is 33, 33 is a higher PE ratio of the most companies that's typically on the premium end higher-end. Only companies that are either growing incredibly fast or are very high quality, get up to that type of PE ratio and many companies like Google meta. Microsoft have a much lower PE
ratio. So right there, it makes Costco look very expensive but then we look at the free cash flow and it also has a very low free cash flow yield of 1.3 percent. Now, the past year, I think was an unusually low amount of free cash flow for Costco. They have proven that they've gotten up to 4 billion. So I think normalized over the past couple of years it's more in line with about 2 point, 2 to 2.5 percent, but regardless, it's still a pretty low.
Cash flow yield and a pretty high P/E ratio. Now, if we look at the history of the PE ratio of Costco, we can see how this companies traded over time and where I bought the company originally, I bought it originally during that circled time period there, right? At the end of 2017 and the beginning of 2018 at that time, period, the PE Ratio was around a 28 Ford PE, and it was very expensive. The rest of the market was much
cheaper, quote, unquote. Out then Costco, lots of different companies were selling out a bigger discount than Costco. And since then, again, the company has returned 160% not counting dividends. So the seemingly expensive company back in 2017 trading at a high 20s PE ratio has beat the market by over double during that time. Period.
That's the point that I try to illustrate this company often looks expensive, but continues to outperform the market and many other companies that are quote unquote. Cheap, and it does this because of its tremendous organic unlevered growth. Even if you adjust it for the multiples and they didn't expand at all from 2017 to 2023, then I still beat the market with my Costco by by a large degree even with no multiple expansion. The truth is for this company.
It never really gets that cheap. That's what I found with Costco, anytime Costco trades down into a PE ratio, that's in the mid-20s, or the Low 20s. The rest of the market is probably in worse condition. That's usually the situation. So, Costco is one of those companies that just looks expensive, all the time, whether it trades down, whether it trades up, it's always looking expensive. And in my opinion, a 33 Ford PE is not the worst price for this
quality of a company. I don't think this is the worst deal right now and I may add to the position a little bit more at this price. I'd love to get it in the higher mid-20s if it trades down to the higher mid-20s, I'll be substantially increasing my position, but as of right now, it's getting to that point where I think it's at a pretty decent deal but that's my take on the current valuation.
I personally think it's going to do a lot better than many other companies that investors say are much cheaper. Costco may not be as cheap but over time the quality of the company will win out and the organic growth wilin out and I hope this helps illustrate. Why this company remains a core holding of mine. One of the nine positions Costco is a key. P'nay in my portfolio.
If you want to see more in-depth analysis, like this and me go over the numbers in the business strategy of different companies, especially the ones that I'm putting major investments in to just make sure you're following along and subscribe to the channel. But that's the portfolio update for today and my recent thoughts on Costco now. I hope you enjoyed. Let me know your thoughts.
If you have any other thoughts or anything that I left out with Costco, let me know in the comments below and I'll have another video out later this week that goes over a lot of the news at my thoughts on a lot of current things going on. That's all for now. Now, see you in the next one. Now, see you in the next one.