What Is The Upside For Costco From $312?

by Trefis Team
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Costco‘s (NASDAQ: COST) stock grew 7% from $291 at the beginning of this year to $312 on April 20, compared to a 13% decline for the broader S&P 500. While Costco’s stock has outperformed thus far, we believe there could still be a modest upside from the current levels. The stock is thriving during the COVID-19 pandemic, as the consumer spending trends are setting up well for the grocery-led retail sector. Our dashboard, ‘What Factors Drove 102% Change In Costco’s Stock Between Fiscal 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

The stock price gain between fiscal 2017 and 2019 can primarily be attributed to steady revenue and earnings growth for the company. Costco’s revenues were up 18.4% from FY 2017 to 2019. This combined with a 15.4% jump in net income margin from 2.1% in fiscal 2017 to 2.4% in fiscal 2019, helped earnings per share grow 36.2%. Costco’s P/E multiple grew from 25x at the end of FY 2017 to 35.3x by the end of FY 2019. As a matter of fact, Costco’s P/E is up to about 38x now, given the positive outlook for the company. This reflects an 8% increase in P/E multiple since September 2019.

Costco’s organic performance has been keeping pace with the U.S. retail industry. This is primarily due to its business model. The company relies heavily on its membership fees, despite the fact that these fees account for only 2% of total revenues. The company’s membership fees contribute around 16% of its value, per our estimates, given the low costs associated with this revenue stream. Like other large retailers, Costco makes small margins on most of its items in its stores, while membership fees help offset these low margins. Paid memberships at Costco have grown at a CAGR (compounded annual growth rate) of 4% over the past two years from 49.4 million in fiscal 2017 to 53.9 million in fiscal 2019.

How Is Coronavirus Impacting Costco’s Stock

Costco is seeing the fear-led public stocking up on essentials at its outlets (or through delivery) during this coronavirus crisis. With the development of the coronavirus, Costco has 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. Costco could also likely have seen some incremental membership sign-ups in the last few months due to a rise in demand. We believe Costco’s Q3 (Mar-May’20) results will confirm the growing trend in its revenues. The company has already reported a 12% growth in sales in the month of March.

Costco’s stock has been doing better than the market overall, as they continue to see increasing sales. Between January 31st and April 17th, Costco stock has gained close to 4% of its value vs. about an 11% decline in the S&P 500. A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia.

Going by historical trends and our valuation dashboard for Costco, we believe that the company’s stock could potentially offer upside returns from the current level. In addition, we also believe that the surge in demand will likely continue in the near to medium term.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

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