30 Sep

Costco: Why Q4 Earnings Might Not Help Its Stock

WRITTEN BY Amit Singh
  • Costco is scheduled to report its fourth-quarter earnings on Thursday.
  • The increase in Costco stock and high valuation could limit the upside.
  • A few analysts downgraded Costco stock due to its high valuation.

Costco (COST) is scheduled to announce its fourth-quarter results after the markets close on Thursday. We expect the company to sustain its sales and earnings growth momentum. Despite healthy sales and earnings growth expectations, the upside in Costco stock seems limited.

Earlier in September, a few analysts downgraded Costco stock due to its high valuation. Bernstein analyst Brandon Fletcher downgraded Costco stock to “underperform” from “market perform.” The analyst said that more competition and the high valuation could impact Costco stock. Meanwhile, Oppenheimer analyst Rupesh Parikh downgraded Costco to “perform” from “outperform.”

Costco’s bottom line has increased at a double-digit rate in the last nine quarters. However, the company’s EPS growth rate showed a sharp sequential deceleration in the last reported quarter. We think that Costco’s bottom-line growth could soften more in the fourth quarter. However, the company’s top-line growth could still be impressive. Costco’s revenues will likely benefit from its industry-leading comparable sales growth rate.

Costco faces tough YoY (year-over-year) comparisons, which could restrict the earnings growth rate. Notably, Costco stock has risen 40.4% on a YTD (year-to-date) basis. The stock is trading at a high valuation multiple. The recent increase in Costco stock, high valuation, and a sequential deceleration in the earnings growth rate could limit the upside in the company’s shares.

Analysts’ expectations

Analysts expect Costco’s top line to continue to grow at a healthy pace. They expect Costco to post revenues of $47.6 billion in the fourth quarter, which implies growth of 7.2% YoY. Costco’s top line will likely benefit from higher comparable sales due to strong growth in the domestic market.

Analysts expect Costco to post an adjusted EPS of $2.54, which represents growth of 7.6% YoY. Higher comparable sales and cost savings could drive the company’s bottom line. However, the projected EPS growth rate indicates a sequential deceleration. During the last reported quarter, Costco’s EPS increased 11.2%.

Costco’s valuation and ratings

The increase in Costco stock has driven its valuation higher, which could restrict the upside. Costco trades at 33.2x its forward earnings estimate, which is significantly above the peer group average of 16.5x. Moreover, Costco trades at 17.9x its next 12-month EV-to-EBITDA multiple, which is also higher than the peer group average of 9.0x.

Among the 29 analysts covering Costco, 17 recommend “buy,” 11 recommend a “hold,” and one recommends a “sell.” Analysts’ target price of $292 reflects an upside of 2% based on its closing price of $285.95 on September 27.

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