Is Costco’s Premium Valuation Warranted?
Costco’s valuation summary
Before we discuss the trading multiples of Costco Wholesale (COST) and its peers, we need to note that the 12-month forward PE (price-to-earnings) ratio helps compare companies based on factors like growth expectations, capital structure, profitability, business models, and risk-return profiles.
As of May 16, 2017, Costco was trading at a 12-month forward PE (price-to-earnings) multiple of 28.5x—significantly higher than the S&P 500 Index’s (SPX) forward PE multiple of 18.8x.
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The company is now trading at a premium to the peer group average of 15.6x. As of May 16, 2017, Target (TGT), Wal-Mart Stores (WMT), Dollar General (DG), and Dollar Tree Stores (DLTR), were trading at forward PE multiples of 13.6x, 17.3x, 15.9x, and 17.8x, respectively.
What sets Costco apart?
Costco has continued to post strong sales despite the industry-wide challenges. The company’s recent trends have fueled investor confidence in the stock. Costco managed to generate healthy comps (comparable same-store sales) growth in March and April 2017, driven by growth across most of its segments.
For the combined nine-week period of March and April, the company’s comps (excluding gas and foreign exchange) improved 4% in the US (SPY) and 3% in Canada. Other International’s comps grew 5% during the same period. Overall, the company’s comps improved by 4% in the combined nine-week period of March and April. Notably, the company’s traffic grew 3% during that period, with the US witnessing 3.7% growth.
Analysts expect Costco to report strong sales in fiscal 2017, driven by improved store traffic, low pricing, and extensive offerings. Analysts expect the company to post a 7.3% increase in sales to $127.4 billion in fiscal 2017. Costco’s EPS (earnings per share) are projected to grow 5.8% to $5.64.
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