Not the Time to Stock Up on Costco; At Praxair, Boring Is Good

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Costco Wholesale (COST)

Mike: So is it true, Jim, that you’ve never been inside a Costco warehouse store?

Jim: Afraid so. Maybe it’s because I’m too lazy to pull in and sign up for the membership, which is--what?--$30 a year?

Mike: It’s up to $40 now. I thought maybe it’s because your car isn’t big enough to hold the mega-boxes of cornflakes and the six-packs of 3-pound cans of coffee that are Costco’s stock in trade.

Jim: Well, as you know, I think the best personal finance writer around is Andrew Tobias, and one of his tenets is that people do well to buy goods in bulk and pocket the savings. I suspect Andy would love Costco and, believe me, I’m no shill for him. Never met the man.

Mike: Don’t forget that Andy first made that point many years ago, when inflation was 12% or higher. Inflation today is a tame beast, yet Costco’s business keeps growing anyway.

Jim: It is quite a story. Costco keeps posting double-digit gains in sales and earnings, and the stock has been stellar over the last few years.

Mike: And let’s put those sales in context. As our readers know, the key gauge in retailing is “same-store” sales, or sales of stores open at least a year.

Jim: Which prevents retailers from pumping up their sales figures simply by opening more stores.

Mike: Well, this year Costco’s same-store sales have surged 11%, which is by far the best performance of any major retailer in the country and nearly three times the industry average.

Jim: That’s all the more remarkable because Costco, with about 300 outlets, sells all its stuff at rock-bottom prices.

Mike: In fact, the company apparently has a policy never to mark up its merchandise more than 14% above cost.

Jim: What is also remarkable is that Costco doesn’t lack for competition. There’s Wal-Mart Stores and Wal-Mart’s own warehouse unit, Sam’s Club. There’s Dayton Hudson’s Target stores, which also sell plenty of items--like paper goods--in bulk. Yet Costco charges on.

Mike: Of course, one thing that Costco also offers is the thrill of the hunt. You walk into a Costco and, I tell you, Jim, it’s a shrine to the impulse purchase.

Jim: Good point. Besides its basic goods like groceries, auto supplies and the like, Costco often stocks crystal or clothing or other items it doesn’t normally carry. And it’s those big-ticket items that people impulsively buy after they’ve picked up their pet food and flashlight batteries.

Mike: And the $40 membership fee is worth it, because I know I’m going to save more than that every year by purchasing all those staples in bulk. Then again, maybe I give it back by buying things in bulk I don’t need.

Jim: That’s it! We just figured out Costco’s strategy. Anyway, Costco is simply a well-run operation, its stores are extremely popular and its performance is enjoying strong momentum.

Mike: Uh-oh. I can hear the old refrain coming.

Jim: Well, look: In the last five years, Costco’s stock has skyrocketed more than sevenfold, more than double the gain of the broader market. And I simply think it’s now trading at too rich a price, in the high $80s, especially because the stock has recently taken off again after a mediocre summer. So now it is selling for 32 times Costco’s expected earnings per share for its fiscal year ending next August. That’s pricey for a discount retailer and gives Costco little room to stumble.

Mike: Guess what? I agree with you, even though Costco’s price-to-earnings multiple is well below Wal-Mart’s 51 P/E. Then again, Dayton Hudson’s multiple is 29.

Jim: Big deal. All that tells me is maybe we should short Wal-Mart.

Mike: And consider this: Costco’s chief executive, Jim Sinegal, sold almost 10% of his holdings in March for about $88 a share.

Jim: You can’t blame him.

Mike: No, but what makes me chuckle is that he said he sold the shares to pay off mortgage debt. Seventeen million bucks in mortgage debt? I don’t know how many houses he’s got or where they are, but he must own at least six in the Silicon Valley at that rate.

Jim: Or maybe he just thought it was a good time to unload the stock, which, incidentally, is set to split again 2 for 1 next month.

Mike: Look, Costco could be like Wal-Mart and just keep going up, but I think that’s a bit of a stretch.

Jim: I’d buy it at a lower price, to be sure. But at this level, any mistake by Costco and this stock could get badly burned. And there’s precedent for this. In the early ‘90s, that’s exactly what happened when Costco’s results went stale for a while.

Mike: Agreed. People have recognized what a great company this is and they’ve bid up its stock to a point that’s now, well, hardly a price-saver.

*

Jim: Don’t Buy

Mike: Don’t Buy

Praxair (PX)

Mike: Every time I hear this company’s name, for some reason it makes me think Praxair must be the Czech national airline. “Prague Air,” or some such.

Jim: It’s actually in a business a lot more boring than that: industrial gases.

Mike: This is an offspring of a company that has no great reputation for keeping the fans amused, and that’s Union Carbide, which spun off Praxair in ’92.

Jim: And it sells all kinds of exciting stuff, such as liquid oxygen, carbon dioxide, helium and the like to big manufacturers’ production plants, and it generates about $4.8 billion a year in sales. Talk about sexy--take that, you Internet companies! Mike, are you awake?

Mike: Want to know how boring this company is? Take a look at its beta.

Jim: Oh, please!

Mike: No, no, I want to do this.

Jim: We promised our readers we wouldn’t waste their time with nonsense like betas and that other technical hoo-haw.

Mike: Just one time. Beta is a measure of a stock’s price movement in relation to the market’s benchmark, the Standard & Poor’s 500 index.

Jim: In essence, beta measures a stock’s volatility.

Mike: Right. And Praxair right now is 1.0, which means it’s been moving exactly in step with the broad market, almost like an index itself!

Jim: Not a bad thing, really. You can do fine keeping in step with the S&P; 500. Truth is, though, Praxair’s stock over the last five years has risen only half as much as the S&P; 500, and the company’s been struggling for the last year or so, both domestically and overseas.

Mike: It gets half its sales from overseas.

Jim: Praxair has had particular problems in Brazil and, overall, it’s really tough for Praxair and its rivals to raise prices to make up for the lower sales. So Praxair’s had its problems. Even so, the stock has held up quite well in recent quarters.

Mike: It’s up 30% over the last 12 months.

Jim: And I know one reason why. Despite its struggle, this Danbury, Conn.-based company has steadily raised its profit margin year after year. In other words, in the early ‘90s it earned about a nickel per dollar of sales. Now it’s earning nearly a dime, despite its struggles. That’s a tribute to the skills of its chief executive, William Lichtenberger, and the rest of his team.

Mike: So what we’re saying is, there’s nothing wrong with boring. I mean, look at the presidential choices we’ll have a year from now.

Jim: You’d buy Praxair’s stock?

Mike: Yes. I don’t expect to be thrilled by its performance, but I don’t expect a wild ride, either. And if it matches the market’s move from here on, so much the better. Everyone needs a little boredom in their portfolio.

Jim: I agree, and here’s why: All signs point to Praxair’s markets having already bottomed and poised to improve over the next year or so, which will help its sales growth and bolster its profit. Also, the stock is selling for a fairly cheap 17 times its ’99 earnings per share. You’re not going to make money hand over fist with Praxair, but you’ll sleep better at night.

Mike: Matter of fact, buy this stock if you want to be put to sleep at night.

*

Jim: Buy

Mike: Buy

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book, “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Costco

Monday: $88.31

Praxair

Monday: $46.00