Is Costco A Better Bet Compared To Walmart After A 7% Decline?

by Trefis Team
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The consumer spending trends are setting up well for the grocery-led retailer sector. Costco (NASDAQ: COST) and Walmart (NYSE: WMT) are seeing the fear-led public stocking up on essentials at its outlets (or through delivery) during this coronavirus crisis. Costco’s stock has declined by close to 7% since early February after the WHO declared the Coronavirus a global health emergency, compared to an almost flat Walmart stock. Both these stocks have fared better than the broader S&P, which declined by 20% since early February. Costco has seen higher average revenue growth of 7% compared to 2% for Walmart between 2014 and 2019. The average annualized adjusted EPS growth for Costco was also higher at 12% compared to – 14% for Walmart. Though Walmart’s relative valuation is ahead of Costco with its P/E multiple standing at 50x vs. 35x for Costco. Overall, it appears that Costco stock could potentially outperform through the current crisis.

View our complete dashboard analysis Is Costco Expensive Or Cheap After A -7% Move Vs. Flat Growth For Walmart? for more details on how Costco and Walmart’s stock fared through the coronavirus crisis, their relative valuations, as well as their financial performance over the last few years. Parts of this analysis are summarized below.

Revenues Should Hold Up Better for Both Through This Crisis

The large retailers have all been doing better than the market overall as they continue to see increasing sales. With the development of the coronavirus, both Costco and Walmart have been handling increased demand and hiring thousands of new workers to meet it. Since many retailers have shut their doors and some state governments have ordered lockdowns, consumers have no choice but to turn to the consumer staples retailers who are remaining open.

CORONAVIRUS CRISIS: Since early February, Costco stock has declined -7% compared to flat growth for Walmart

  • Costco’s stock has declined by about 7% since early February, compared to a flat growth for Walmart, after the WHO declared a global health emergency relating to Coronavirus.
  • Costco stock declined 8%, while Walmart stock is down 3% since March 8th, as U.S. cases accelerated.

HISTORICAL PERFORMANCE: From 2009-2019 Costco stock has grown at 3.2x the rate of Walmart

  • Costco stock went from $42.79 at the end of 2009 to $293.30 at the end of 2019, representing a change of 585.4%.
  • During the same time period, Wal-Mart went from $41.53 to $118.32 representing a change of 184.9%.
  • This implies that Costco stock grew at 3.2x the rate of Wal-Mart Corp.

ANALYSIS:

How do valuations for Costco and Walmart compare, based on the review of fundamentals?

  • P/E Ratio: Based on trailing 2019 P/E ratios, COST stock looks expensive compared to prior years and attractive compared to Wal-Mart Corp.
  • Costco’s current P/E multiple (based on 2019 results) stands at about 35x, compared to about 50x for Walmart.

Historical Revenue and EPS Growth: Costco stock looks attractive compared to Wal-Mart Corp.

  • Costco 2014-19 annualized revenue growth of 7% is 4.2x that of the Walmart’s annualized revenue growth rate of 2%.
  • Costco 2014-19 annualized EPS growth of 12% is much higher than that of the 2014-19 Walmart’s annualized EPS growth rate of -14.2%.

Conclusion

Based on historical performance, Costco appears to be more attractive compared to Walmart in the current crisis. Both the companies’ stocks have been more resilient through the crisis, thus far, and Costco could see a larger upside if the health crisis abates, considering its revenue and EPS growth has been higher than Walmart. Both companies have enough cash from operations to manage their near term interest expenses. Moreover, Costco’s P/E ratio is lower compared to that of Walmart.

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