Costco stock trades at a premium
Costco (COST) stock has historically been trading at a premium multiple compared to Walmart (WMT) and Target (TGT) thanks to its higher growth rate. As of April 11, 2018, Costco stock was trading at a forward PE (price-to-earnings) multiple of 25.4x, which is significantly higher than that of peers. Moreover, Costco stock is also trading at a higher valuation multiple when compared with the benchmark index. The S&P 500 Index traded at a forward PE multiple of 16.9x as of April 11, 2018.
Given the recent downtrend in its stock, Costco is trading below its historical average of 26.2x. In comparison, Walmart and Target stock were trading at a forward PE multiple of 17.4x and 13.8x, respectively. A higher valuation multiple doesn’t always reflect whether a stock is fairly priced since the PE multiple varies with the leverage profile of the company. Moreover, investors could also be willing to pay a premium for a company with a higher growth rate.
Costco offers better growth rate
As we discussed previously, Costco has been outperforming its peers with its industry-leading sales and earnings growth rate. Costco’s long-term growth rate is pegged around 12.0%, which is significantly higher than Walmart and Target’s projected long-term growth rates of 7% and 6%, respectively. However, Costco’s dividend yield of 1.1% remains lower than that of Walmart’s 2.4% and Target’s 3.4%.
Going forward, analysts expect Costco’s top and bottom lines to continue to grow at a healthy rate driven by value pricing, expanded offerings, the high membership renewal rate, and growth in its e-commerce arm.