Costco Wholesale (NASDAQ:COST) stock has been a sensational performer this year, with more than 23% in gains year-to-date. As we roll into the company’s fourth-quarter earnings (set to be released tomorrow after market close), Costco will have yet another chance to show that it’s the ultimate defensive growth stock to own for all seasons. Further, despite the high price of admission, analysts remain incredibly bullish going into earnings, giving the stock a “Strong Buy” rating.
Though I’m not inclined to “play” earnings, Wall Street is likely to be proven right in the long term as Costco looks to make a run for all-time highs in the back half of the year. Like most analysts, I remain bullish on Costco stock as it plays the excellent hand it was dealt to the best of its ability.
Food Inflation is a Plus for Costco (and its Members)
As the cost of necessities (think food and other goods Costco sells at competitive prices) keeps rising, I don’t see a scenario where consumers suddenly stop shopping at Costco. Indeed, there’s a lot of value to be had in a Costco membership. Though inflation is poised to wind down from here with every interest rate hike from the Fed, it will be hard for consumers to kick the bargain-hunting mentality, even once the economy heats up again and consumer sentiment shoots higher.
Don’t expect the foot traffic over at Costco to sink anytime soon. The company helped many consumers stretch their dollar as far as it can go amid the last two years’ worth of high inflation, and let’s not forget about those cheap hot dogs ($1.50) and their ability to beckon crowds. Indeed, Costco hot dogs do seem that much tastier amid the cost-of-living crisis!
Costco does a fantastic job keeping its customers happy, especially with ongoing food affordability concerns. There’s nothing quite like buying goods in bulk over at the local Costco and saving a ton in the process.
Costco’s Growth Justifies the High Price of Admission
The company has done a great job of expanding through the years, but there’s still plenty of room for the company to open new stores as it looks to take more market share away from other players in the defensive corner of retail. At north of 41 times trailing price-to-earnings (P/E), Costco stock is not cheap, with shares trading at a huge premium to the discount store industry average of 29.2 times. Still, Costco stock doesn’t deserve to be cheap, given its growth potential.
The company’s growth profile isn’t just impressive; it’s relatively low-risk, given its tremendous brand affinity, cost advances, and lower dependence on the state of the global economy. Indeed, I think it’s safe to say that almost nobody would be against having more Costcos open across the nation!
Amid inflation, bargain hunting for everyday goods almost seems like a competitive sport. Without a Costco membership, many find it challenging to capitalize on the broad savings available.
Kirkland Signature: A Key Component to Costco’s Moat
Further, the Kirkland Brand private label has shined for the company over the past few years. Consumers don’t just look to private labels to save a few additional dollars. It’s more about the cost-to-quality balance. In that regard, Kirkland stands head and shoulders above most other private labels and even certain big-name brands.
As the economy pulls the brakes amid elevated rates, don’t count on Costco to follow broader markets lower. Oppenheimer analyst Rupesh Parikh hiked his price target back in July to $630 from $575, citing low prices, “uniquely differentiated offerings,” and “other bells and whistles of a Costco membership.”
I believe Mr. Parikh is right on the money. Costco stock seems to be in the sweet spot as the economy hits a crossroads. Recession or not, Costco is a freight train that may keep on rolling higher, perhaps much higher from here.
Is COST Stock a Buy, According to Analysts?
On TipRanks, COST stock comes in as a Strong Buy. Out of 19 analyst ratings, there are 15 Buys and four Hold recommendations. The average Costco stock price target is $588.39, implying upside potential of 5.8%. Analyst price targets range from a low of $478.00 per share to a high of $651.00 per share.
The Bottom Line on Costco Shares
A Costco membership is like a secret weapon for everyday consumers looking to save on their grocery bills. Going into 2024, the appetite for low prices and high quality is unlikely to fade, boding well for COST stock.
With earnings coming up tomorrow, investors should be ready to pounce should the market not be satisfied with what Costco serves up. Although I think the firm will crush estimates (Q4-2023 earnings per share expected to come in at $4.79), it’s been such a gloomy September that even a good result may not be enough to impress investors.