HD, PEP, or COST: Which Mega Cap Stock is a Better Pick?

Investors’ concerns about a possible recession are growing amid stubbornly high inflation. During these highly volatile and uncertain times, many are looking for opportunities to invest in the stocks of large, well-established companies with solid track records and strong fundamentals. Here, we will discuss three mega-cap stocks (stocks with more than $200 billion market cap) – Home Depot (NYSE:HD), PepsiCo (NASDAQ:PEP), and Costco (NASDAQ:COST) and use TipRanks’ Stock Comparison Tool to pick the most attractive one.  

Home Depot (HD) Stock

The U.S. housing market is cooling due to rising mortgage rates. This is not favorable for leading home-improvement retailer Home Depot. However, given the company’s impressive track record, even during challenging times, several analysts remain confident about its long-term prospects.  

Despite a challenging market, Home Depot exceeded analysts’ Q2 estimates, with revenue rising 6.5% to $43.8 billion and earnings per share (EPS) increasing 11.5% to $5.05.

Home Depot’s efforts to enhance its product offerings for DIY (do-it-yourself) and professional customers are expected to ensure continued growth.

What Are Analysts Saying About Home Depot Stock?

This week, Cowen analyst Max Rakhlenko initiated coverage on Home Depot stock, with a Buy rating and a price target of $350. The analyst stated, “HD is well positioned to harvest benefits following its investment cycle, which should enhance productivity and drive EBIT margin expansion.”

Rakhlenko expects the company’s EBIT margin to expand by over 65 basis points to 15.9% by FY25 compared to FY21. He expects the company’s “ongoing SG&A leverage,” driven by improved store efficiency and supply chain utilization, to drive higher margins. The analyst also projects “modest gross margin reversion following annual declines since FY18.” That said, Rakhlenko’s FY25 gross margin estimate of 33.9% remains below pre-pandemic levels.

Overall, Home Depot stock earns a Strong Buy consensus rating based on 16 Buys and three Holds. The average HD stock price prediction of $360.17 implies 33.7% upside potential. Shares have declined 35.1% year-to-date. HD’s dividend yield stands at 2.6%.  

PepsiCo (PEP) Stock

Despite stubbornly high inflation and supply chain challenges, the food and beverage giant recently reported market-beating Q3 results and raised its full-year outlook. PepsiCo’s price hikes and cost control efforts helped deliver strong Q3 results. The company’s leading position in the snack food and beverage market and its popular global brands give it pricing power.

PepsiCo now expects to deliver organic revenue growth of 12% in 2022, up from the previous estimate of 10%. It anticipates 10% core constant currency EPS growth, compared to its previous estimate of 8%.

PepsiCo is focused on innovating healthier beverage and food offerings and expanding further in high-growth categories, like energy drinks. In August, the company made a $550 million investment in energy drink maker Celsius Holdings. Back in 2020, PepsiCo acquired Rockstar to expand its energy drink portfolio.  

Is PepsiCo a Good Stock to Buy?

Following the Q3 print, Wedbush analyst Gerald Pascarelli increased the price target for PepsiCo stock to $190 from $185 and maintained a Buy rating based on strong results and an improved outlook. Pascarelli noted that the company’s guidance indicates that trends will slow sequentially in Q4. That said, the analyst believes that PepsiCo is well-positioned to post its second consecutive year of double-digit local currency EPS growth.

All in all, PepsiCo scores the Street’s Strong Buy consensus rating based on seven Buys and four Holds. The average PepsiCo stock price target of $183.70 suggests 7.1% upside potential. Shares are down 1.3% year-to-date. PepsiCo became a dividend king (50 consecutive years of dividend hikes) this year and has a dividend yield of 2.5%.

Costco (COST) Stock

Costco is considered one of the most consistent players in the retail industry. It operates 839 warehouses, including 578 in the U.S. The membership-only warehouse chain enjoys tremendous customer loyalty, as reflected in its renewal rates. At the end of Fiscal 2022, which ended August 28, 2022, the company’s member renewal rate was 92.6% in the U.S. and Canada, and 90.4% worldwide.

Despite an adverse retail market backdrop, Costco’s net sales increased 10.1% year-over-year to $21.46 billion in the retail month of September (five weeks ended October 2, 2022). Comparable sales were up 8.5%.

Is Costco Stock a Good Investment?

Following Costco’s September sales update, Baird analyst Peter Benedict noted that core comparable sales growth of 8.6% was below the prior six-month average growth rate of 9.6%. However, the analyst believes that the September growth rate “remained healthy.”

Benedict also pointed out that traffic trends were down sequentially due to the impact of Hurricane Ian. In contrast, the core average ticket grew sequentially despite certain indications of moderating cost inflation. Overall, Benedict reiterated a Buy rating on Costco stock with a price target of $575.

On TipRanks, Costco stock scores a Strong Buy consensus rating based on 17 Buys and four Holds. The average COST stock price target of $558.75 implies 20.3% upside potential. Costco stock has declined 18.2% year-to-date. Its dividend yield of 0.71% is lower than Home Depot and PepsiCo.

Conclusion

Home Depot, PepsiCo, and Costco have time and again proved their ability to withstand tough economic conditions. PepsiCo stock has fared better than the broader stock market and has shown greater resilience compared to Home Depot and Costco stocks.

That said, Wall Street sees the pullback in Home Depot stock as an attractive buying opportunity and estimates a higher upside potential for HD stock than in PepsiCo and Costco.

Home Depot scores a “Perfect 10” as per TipRanks’ Smart Score System, indicating that the stock could likely outperform market averages over the long term.

Disclosure