Costco Wholesale (COST), colloquially referred to as simply Costco, is a well-known big box retail chain that sells items in bulk and offers discounted household products and groceries.
When consumers anticipate adverse world events that could hinder supply chain activity, such as the COVID-19 pandemic, they will often panic shop at Costco. The company has clearly benefited from some unfortunate recent developments in the world, and that will likely limit its future upside potential. Costco has a high valuation and a low dividend yield. I’m neutral on COST and it doesn’t seem like a good month for investors to be shopping for Costco stock.
Costco and the dock workers’ strike
Port workers on the US East and Gulf coasts have officially quit their jobs and started striking on October 1. However, their contracts with employers expired at the end of September and consumers used this as an opportunity to stock up on essential goods. Many people remember what happened near the outbreak of the COVID-19 pandemic, when citizens rushed to purchase large quantities of products such as toilet paper, fearing that they would later encounter empty shelves.
While the dock workers’ strike has already been resolved and will undoubtedly take a toll on the U.S. economy, it certainly boosted Costco’s sales in September. In early October there was probably much of the same to be seen. Investors should keep this in mind when assessing Costco’s results.
Costco acknowledges “abnormal” store activity
Amid the panic buying that likely occurred in anticipation of the dock workers’ strike, Costco management acknowledged that store activity increased in September due to the outbreak of Hurricane Helene. Costco management specifically cited “abnormal consumer activity related to Hurricane Helene and port strikes.” Hurricane Milton could make it rain again on Costco’s sales in October, but this is another one-off event. Investors probably shouldn’t expect such events to boost Costco indefinitely.
Breaking down Costco’s sales figures for the “retail” month of September (the five weeks ending October 6, 2024), the company’s net sales rose 9% year over year to $24.62 billion. Additionally, Costco’s U.S. comparable store sales rose 6.5% in the same time frame and the company’s e-commerce sales rose 22.9%.
The spike in e-commerce sales is notable, but it’s easy to imagine consumers ordering essential household items online once they hear about the port strike and hurricane developments. I can’t expect Costco to maintain a ~23% growth rate in e-commerce sales for much longer.
Costco’s high valuation and low dividend yield
Costco investors may already be ahead of themselves in my opinion, as the valuation of COST stock is quite high. Alarmingly, Costco’s adjusted (non-GAAP) trailing-twelve-month price-to-earnings ratio is 55.1x. In contrast, the median price-to-earnings ratio for the industry is 17.8x and Costco’s five-year average price-to-earnings ratio is 41.2x. It is entirely possible that all current and expected benefits from the above events are priced into COST stock.
Income-oriented investors are also not very well served by Costco stock at its current market price. The average annual dividend yield for the consumer cyclical sector is about 1%, compared to about 0.5% for COST. Investors won’t get rich from Costco’s quarterly dividend payments. Regardless of whether you’re a value-oriented investor or looking for high returns, Costco stock probably doesn’t look attractive right now.
Digging deeper into Costco’s sales performance
Delving deeper into Costco’s recent sales performance, we can note that the company reported fourth-quarter net sales of $78.2 billion. That’s just a 1% increase compared to the $77.4 billion in net sales Costco generated in last year’s quarter.
As we’ll discuss below, analysts are generally lukewarm on COST stock. This assessment makes sense to me, despite Costco’s impressive-looking performance in September. In light of the company’s lackluster net sales growth in the fourth quarter, one might suspect that September was just an outlier.
Yellow flags in Costco’s financials
Additionally, after taking a look at TipRanks’ Financials page for Costco, we’ll spot some potential warning signs. Costco’s cash and cash equivalents position fell from $15.23 billion in the prior period to $11.14 billion in the quarter ended August 2024. During that time frame, Costco’s free cash flow fell from $2.17 billion to $1.38 billion, which is a remarkable drop. The deteriorating cash picture further supports my neutral position on COST shares.
The company also faces tough competition, and it will be interesting to see how investors react to materially lower sequential results. According to TipRanks’ earnings page for Costco, we see earnings per share of just $3.78 for the current quarter. That represents a significant decline from last quarter’s earnings per share of $5.29. That, in my opinion, is another reason to be cautious with COST stock right now.
Is Costco Stock a Buy According to Analysts?
On TipRanks, COST is listed as a Moderate Buy, based on sixteen Buy and seven Hold ratings assigned by analysts over the past three months. There are currently no sales ratings. The average COST stock price target is $938.95, implying around 5% potential upside.
If you’re wondering which analyst to follow on COST stock, the most profitable analyst covering the stock (over a one-year period) is Laura Champine of Loop Capital Markets, with an average return of 30, 09% per rating and a return of 96%. success rate.
Conclusion: Should Investors Consider Costco Stock?
Currently, COST stock doesn’t look very attractive based on value or dividend yield measures. The company’s retail sales in September were very impressive, but it’s hard to imagine that the market hasn’t already factored the positive numbers into the current valuation. Future results are also sensitive to a lack of one-off events that have boosted Costco’s business lately.
As a consumer, I might shop at Costco to stock up on essential items, but as an investor, I don’t feel any pull to invest in COST stock right now. For now, I remain neutral on Costco stock.
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