Analyzing Costco’s Premium Valuation
Costco (COST) stock was trading at a forward PE (price-to-earnings) multiple of 29.2x as of December 5, 2017, which is significantly higher than the peer group average of 16.2x. Costco is also trading at a premium compared to the S&P 500 Index’s (SPX) forward PE multiple of 18.7x. Costco stock is trading at a higher valuation multiple compared to the Consumer Staples Select Sector SPDR ETF (XLP), which was trading at a forward PE multiple of 21.3x.
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In comparison, Kroger (KR), Target (TGT), and Walmart (WMT) stock were trading at a forward PE multiple of 12.9x, 14.6x, and 21.1x. Notably, the forward PE multiple depends on several factors including leverage and growth expectations. Costco offers a superior growth rate compared to its peers, which is why it commands a higher valuation multiple. The company’s long-term EPS (earnings per share) growth rate stands close to 11% compared to the peer group average of 4%.
Given the pressure on margins stemming from price competition and increased business investments, Costco’s valuation seems a bit high.
Analysts’ growth projection
Analysts expect Costco to continue to report strong sales and EPS growth. Analysts expect the company’s sales to grow 6.5% to $137.4 billion in fiscal 2018. Costco’s top line is expected to grow at a rapid rate in fiscal 2019 and 2020 due to growing store traffic and a rise in the average transaction size. Costco’s EPS is projected to grow 10.8% in fiscal 2018 due to higher sales.