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Is Costco’s Comps Growth Overshadowing Valuation Concerns?


Jul. 10 2019, Published 8:45 a.m. ET

Costco stock continues to rise

So far, Costco (COST) shares have generated stellar returns this year. The shares have outperformed the benchmark index. Costco stock was supported by the industry-leading comps growth rate amid the heightened competitive environment. The company’s earnings continued to grow at a double-digit rate, which drove its stock higher.

As of Tuesday, Costco stock has risen 32.5% on a YTD (year-to-date) basis. The S&P 500 increased 18.9% during the same period. Walmart (WMT) and Target’s (TGT) stock prices increased due to strong momentum in the base business. The momentum was strong due to improved comps.

Walmart and Target shares outperformed the broader markets in terms of growth. The shares have increased 21.2% and 32.8% on a YTD basis.

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Industry-leading comps growth

Costco’s comps have grown at an impressive rate. On average, Costco’s monthly comps have increased 7% in the past 12 months. The growth is encouraging considering the increased competitive activity.

Walmart and Target reported impressive comps, which drove their stocks. However, their comps growth rate is lower than Costco.

Costco’s industry-leading comps reflect steady traffic growth and a larger ticket size in the US and international markets. Costco’s membership base is strong with a high renewal rate, which indicates strength in its business.

Costco’s high valuation

The uptrend in Costco stock indicates that investors are overlooking the company’s high valuation. We’re impressed with Costco’s sales and earnings growth. We expect the company to sustain the momentum in the coming quarters as well. However, Costco’s high valuation compared to its peers is a concern.

Costco stock has always traded at a higher valuation multiple compared to Walmart and Target stock. Walmart’s earnings growth has stagnated. However, Target offers a similar kind of growth at a lower valuation.

Costco is trading at 31.6x its fiscal 2020 estimated EPS of $8.53, which looks expensive based on its the projected growth rate of ~6% during that period. Costco stock is trading at a significantly higher multiple than Target and Walmart. Walmart and Target shares are trading at forward PE ratios of 23.2x and 14.6x, respectively.

We expect Costco’s sales to continue to grow at the industry-leading rate in the coming quarters due to value pricing and expanded offerings. Square footage expansion and higher membership fee income are expected to support the sales growth rate. Costco’s EPS growth rate is expected to moderate in the absence of any significant boost from a lower tax rate. Costco faces tough YoY comparisons, which will likely restrict the bottom-line growth.

Target’s top-line growth is expected to lag Costco. However, Target’s bottom line is expected to grow ~10% in fiscal 2019. The company’s earnings are projected to increase 6.4% in fiscal 2020.


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