Should Investors Ignore Costco’s Valuation over Comps?

Solid performance

Shares of Costco (COST) are up 16.4% YTD (year-to-date) as of March 19. The strong uptrend in Costco stock is supported by the company’s back-to-back impressive sales and earnings performances. Costco outperformed its peers, including Walmart (WMT) and Target (TGT), with its comps growth rate.

Costco’s net sales have grown at an average rate of 10.6% in the past seven quarters, reflecting its robust comps growth led by increases in traffic and ticket size. Its EPS have risen at an average rate of 21.3% in the past seven quarters driven by stellar sales and a lower effective tax rate. The company’s high membership renewal rate is also positive.

Should Investors Ignore Costco’s Valuation over Comps?

Rivals Walmart and Target have also impressed with their recent comps performances. Both companies posted strong comps growth driven by continued increases in traffic and ticket size despite heightened competition in the grocery business.

Outlook

Costco is likely to sustain the momentum in its sales and earnings in the coming quarters. However, its rate of growth is projected to slow a bit as it faces tough year-over-year comparisons. We believe that comps momentum will support the stock prices of Costco, Walmart, and Target in the near term.

Costco’s comps growth is projected to be better than Walmart’s or Target’s due to its sustained investment in price and its loyal membership base. Its earnings are expected to benefit from cost savings and strength in its base business.

Costco’s current valuation is a concern. However, historically, Costco stock has traded at high valuation multiple.