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Costco Stock: The Value Proposition Is Improving
Stock Analysis & Ideas

Costco Stock: The Value Proposition Is Improving

Shares of membership-only bulk goods retailer Costco Wholesale (COST) were down about 5% at the trough on Monday’s trading session earlier this week, as high-multiple stocks continued leading the charge lower. Undoubtedly, Costco isn’t the type of unprofitable growth stock that’s been at ground zero of the latest growth-focused sell-off, but the name got punished recently anyways.

With one of the heftier multiples on the S&P 500, should investors view the recent pullback in the top retailer as a cause for concern? Or, has COST stock been unfairly dragged lower, given its incredible performance over the past year?

With Costco stock flirting with a correction, I’m inclined to change my tune on the name. While the valuation is still a tad hot, it’s hard to be anything but bullish on the name after its latest slide, which I view as mostly unwarranted.

Costco Stock: The Charlie Munger Favourite Nears 10% Drop

Charlie Munger, Warren Buffett’s right-hand man, has had so many good things to say about Costco’s business over the years. The company has been a hot spot for consumers looking for a great value and a way to (mostly) dodge and weave through the horrific inflation we’ve witnessed in recent quarters.

Undoubtedly, Costco has maintained its value proposition for its consumers as its sales surge. As a result, brand affinity seems to be at a high point if it wasn’t already going into this pandemic.

Indeed, Costco has had a granite chin when going in the ring against elevated inflation levels. As inflation persists, Costco will be left standing, even if its rivals are knocked down, given its operational expertise and focus on keeping its customers happy and subscribed, rather than passing on every bit of higher prices onto them.

In simple terms, Costco can take a hit to the chin, and its customers surely appreciate it these days. As inflation wears off (possibly in 2022, as the U.S. Fed aims to curb it), Costco will make it through to the other side, likely with some business from its retail competitors.

Indeed, it’s all about having a solid value proposition when it comes to retail and other commoditized necessities. Costco comes out ahead of most other big-box retailers and grocers in that category.

The only primary concern with Costco has lied with its lofty valuation. Costco stock isn’t exactly cheap at around 45 times trailing earnings even after nearly correcting. However, it doesn’t deserve to be cheap, given its operational excellence and its proven management team.

Costco Stock Drops; Price Targets Surge

Over the past week, many analysts have been raising their price targets. One of the latest upgrades came courtesy of UBS, which hiked its price target to $625 from $600, implying ~19% upside from current levels.

Indeed, the combo of Costco stock’s falling share price alongside analyst price target hikes is nothing short of encouraging. Whether it’s too soon to go bargain-hunting at the retailer remains to be seen. Regardless, Costco has a lot going for it as it makes it through what could be the final innings of this inflation storm.

Wall Street’s Take

Turning to Wall Street, COST stock comes in as a Strong Buy. Out of 22 analyst ratings, there are 18 Buys and four Hold recommendations.

As for price targets, the average Costco price target is $577.24, implying 9.9% upside potential. Analyst price targets range from a low of $482 per share to a high of $650 per share.

The Bottom Line on COST Stock

Through the wave of inflation, it’s arguable that Costco’s value proposition has increased relative to its peers. Costco’s willingness and ability to keep the value proposition for its members could have a long-lasting positive effect on its membership renewals and growth.

In essence, Costco may be poised to reap long-term gain for a bit of short-term pain. Such pains have been relatively muted, which is a testament to the firm’s admirable operational leadership. Membership renewals stand at around 92% in Canada and the U.S. I expect the number to rise moving forward.

In short, Costco is doing incredibly well. The fundamentals are on solid footing, even though the stock may not be, as it is 8% off its highs.

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