Costco Update December 20, 2017

Costco is updated and rated (lower) Sell at $187.51. (corrected from the original posting that said (lower) Buy

I hesitate to rate this exceptionally excellent company in the Sell range. But it does look somewhat over-valued at this time. I probably could have just as easily rated it Weak Sell / Hold. Its last three quarters have been exceptionally strong. And the current quarter may also show strong growth given that the prior year comparable quarter saw a decline in earnings per share of 5%. After that it will face tougher comparable quarters. It is quite possible that the income tax reduction will provide a boost in earnings to justify the price.

Overall, for all the reasons indicated in the report I settled on a rating of (lower) Sell and I sold my few remaining shares today. (I was selling in an RRSP account where triggering a taxable gain was not an issue)

It will be interesting to see if Costco will have a philosophy of using the lower income taxes to boost profits or will they be inclined to use some of it to reduce prices? After all, if they were satisfied with their 23% ROE this year, they might decide to target a similar ROE and drop prices. This will also depend on competitor strategies. Costco has never had a strategy of maximizing profits, so it is not a foregone conclusion that they would choose to have the income tax reduction drop to the bottom line. And, in any case, competition could force them to drop prices.