Costco’s Earnings Growth Led to a Premium over Its Peers



Valuation summary

Costco (COST) stock was trading at a forward PE (price-to-earnings) multiple of 27.7x on June 15, which was significantly higher than its peers. If we look at the historical trend, Costco stock has always traded at a premium when compared with Walmart (WMT) and Target (TGT) stock, as can be seen in the graph below.

In comparison, the S&P 500 Index (SPX) was trading at a forward PE multiple of 17.5x on June 15.

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Analyzing Costco’s high PE multiple

Costco (COST) offers higher sales and earnings growth, resulting in its stock commanding a premium over its peers. As we discussed earlier in this series, Costco has been generating strong comps growth, and its earnings per share are growing at a faster rate than its peers.

However, the company’s current valuation is roughly 7.0% higher than its historical average multiple of 25.8x. Costco stock is trading at a record high, which indicates that the positive factors stemming from the company’s strong sales and earnings growth rates may have already been priced into the stock.

Costco’s bottom line is expected to mark more than 20.0% growth in fiscal 2018. However, its growth rate is expected to decelerate a bit in fiscal 2019, reflecting tough year-over-year comparisons and continued investments in price amid increased competition in the grocery business.


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