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How Costco’s Valuation Compares to Peers

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Apr. 12 2018, Published 7:05 a.m. ET

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.

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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.

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