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Could Deceleration in Growth, High Valuations Dent Costco Stock?

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What analysts expect

Costco (COST) is expected to announce its fiscal fourth-quarter[1. fiscal Q4 2018 ended August 31] results on Thursday, October 4. Analysts expect Costco’s sales and earnings to grow. However, the rate of growth is projected to decelerate sequentially.

Costco’s top line has been growing at a brisk pace, driven by stellar growth in its comps. Its rivals Walmart (WMT) and Target (TGT) have also reported robust comps growth in the first two quarters of the current fiscal year. However, their respective growth rates have lagged Costco’s growth rates.

Costco’s investment in price and its high membership renewal rate is expected to support its top line. Meanwhile, higher comps, focus on cost reduction, higher membership fee income, and a decline in the effective tax rate are expected to drive double-digit growth in its bottom line.

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Valuations are a concern

Costco stock rose 25.4% on a YTD (year-to-date) basis on September 24 and has outperformed the benchmark index. However, the company’s high valuation is a concern and could restrict the upside in its stock.

Costco stock trades at 30.1x its estimated EPS of $7.75 for fiscal 2019,  which looks expensive based on the projected growth rate of 9.0% in that period. The company faces a tough year-over-year comparison in fiscal 2019, and it’s expected to benefit from the closure of 63 Walmart-owned Sam’s Club stores and a lower effective tax rate. These events could lead to a deceleration in its sales and earnings growth rate.

However, the company’s fundamentals remain strong, and analysts expect Costco to sustain its growth momentum in the coming quarters.

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