Costco Shares — 3 Pros, 3 Cons

Despite its size, Costco (Nasdaq: COST ) still has the ability to post strong
growth rates. In the latest quarter, the company's revenue shot up by 12.5% to
$21.2 billion. Comparable-store sales came to 10% in the U.S. and 11% in
international markets. While it was another good performance, it was still a bit
below Wall Street's consensus, although Costco's bottom line met
expectations. Regardless, the company's shares have been solid this year,
posting a gain of more than 18%. In fact, their average annual return has been
17.8% for the past three years. Can Costco keep up the momentum? Let's take a
look: Pros Strong platform. Costco charges an annual membership fee, which is a
great source of recurring revenue. The company also uses its large store
locations as inventory storage systems, which cuts down on costs. And to keep
traffic coming through its doors, Costco provides many daily necessities like
gasoline and groceries. Pricing power. As seen with the disaster at Netflix
(Nasdaq: NFLX ), it can be extremely difficult to raise prices. But Costco
should have little resistance from customers. The company plans to raise its
membership fees by 10%. This should provide a nice boost to profitability over
the next couple years. Global growth. So far, it looks like Costco's
membership model is resonating with other countries. To this end, the company is
putting more resources into international expansion. Some of the areas of focus
include Canada, the U.K., Mexico, Korea and Japan. Cons Leadership. In January,
CEO James Sinegal will step aside. He has been at Costco since the early 1980s.
The company will continue to have a strong management team (the current COO,
Craig Jelinek, will take over as CEO), but when it comes to transitioning a
legendary CEO, the process could be disruptive. Competition. The strong growth
rates in the discount industry have attracted significant competition. Costco
must deal with rivals like BJ's Wholesale Club (NYSE: BJ ), Big Lots (NYSE:
BIG ), PriceSmart (Nasdaq: PSMT ) and Wal-Mart (NYSE: WMT ). Cost pressures. The
worldwide increases in materials has moderated somewhat, but they are still a
problem for low-cost operators like Costco. The result has been more pressure on
margins. Verdict Costco's stock is not cheap, coming to about 25 times
earnings. But then again, the company should continue to grow at a healthy rate
for the long term. The company still only has about 600 stores, and
international efforts are still in the early stages. Besides, consumers are
likely to remain focused on value-oriented retailers, of which Costco is a
leader. The pros outweigh the cons on the stock. Tom Taulli runs the
InvestorPlace blog " IPOPlaybook ," a site dedicated to the hottest news and
rumors about initial public offerings. He is also the author of "All About
Short Selling" and "All About Commodities." Follow him on Twitter at
@ttaulli . As of this writing, he did not own a position in any of the
aforementioned stocks.