Costco (COST) is an American multinational corporation that operates a membership-only chain of big-box retail stores.
On September 1, Costco reported its net August sales report, with 14.2%, 15.5%, and 16% growth in sales for its four-, 16-, and 52-week periods.
The company keeps beating estimates, but the stock trades at 40x 2022 EPS. I believe growth is already priced in, and am neutral on the stock going forward. (See Costco stock charts on TipRanks)
Memberships are Costco’s best product, as they compel people to shop in order to gain value from the paid membership. The company had 109.8 million total cardholders as of May 2021, with a 91% renewal rate.
Future Growth, Valuation
Like many retailers, such as Target (TGT) or Amazon (AMZN), Costco is benefiting from the remote-work trend, as more meals get cooked at home.
The company will report its fourth quarter and fiscal 2021 annual results on September 23. Usually, the fourth quarter is Costco’s strongest quarter by far, and it could be a record-breaker in terms of revenue.
Overall, everything looks excellent from a business perspective. However, price is important. Companies as well-known as Costco are difficult to find at cheap prices, so overpaying a bit is common. Nonetheless, Costco looks too expensive at 40x 2022 EPS.
Competitors such as Walmart (WMT) or Target are trading at 23x and 20x 2022 EPS respectively. While Costco may be a better company than Target or Walmart, this does not seem right. There are better opportunities in the market right now, which will probably give better future returns to investors.
Wall Street’s Take
According to Wall Street, Costco has a Strong Buy consensus rating, based on 13 Buys, four Holds and zero Sells assigned in the past three months. At $468.14, the average Costco price target implies 1.8% upside potential.
Bottom Line
There are a lot of companies like Costco in today’s market.
Great businesses, with defined competitive advantages, trading at high multiples.
The stock price will keep rising, there is no doubt, but at a much lower pace. This happens to every richly valued business in the stock market. Costco is due for some compression, either by a decline in price or by fundamentals catching up with the price.
Disclosure: Álvaro Romero held no position in any of the stocks mentioned in this article at the time of publication.
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