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Costco: Concerning Valuation despite Impressive Comps


Jun. 17 2019, Updated 1:25 p.m. ET

Stock performance

Costco (COST) shares outperformed the broader markets. The company’s shares have risen 27.7% on a year-to-date basis as of June 14. Costco’s impressive comps supported the uptrend in its stock. Costco’s bottom line has marked double-digit growth in the past few quarters, which is encouraging.

On average, Costco’s monthly comps have grown 7% in the past 12 months due to the growth in its traffic and ticket size. Costco’s comps rose 5.5% during the last reported quarter. Walmart (WMT) and Target (TGT) also posted impressive comps in the past several quarters, which drove their stocks higher. However, Costco continued to outpace its peers with its comps growth rate. Walmart and Target shares have risen 17.1% and 32.8% in 2019. So far, the S&P 500 has risen 15.2% in 2019.

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Valuation could limit the upside

While we’re impressed with Costco’s performance on the sales and earnings front, we don’t like its valuation. Historically, Costco has traded at a premium valuation compared to its peers. Due to the challenging operating environment with uncertainties about the tariffs, the company’s rich valuation could limit the upside in the stock.

Costco faces tough year-over-year comparisons, which could restrict the earnings growth and its stock.

Costco stock trades at a forward PE ratio of 31.3x, which is significantly higher than Target and Walmart’s forward PE ratios of 14.6x and 22.4x. Costco is trading ~16% higher than its historical average multiple of 26.9x.


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