Does Costco Stock Have More Room For Gains After Rising 40% in 2023?

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Trefis
COST: Costco logo
COST
Costco

Note: Costco FY’23 ended on August 27, 2023.

After a 39% increase in 2023, at around $667 per share, we believe Costco (NASDAQ: COST), a warehouse club operator – is fairly priced. COST stock has increased from around $479 to $667 in the last twelve months, outperforming the broader indices, with the S&P growing about 21% over the same period. Costco has shown a consistent performance at driving revenue coupled with its dedication to enhancing customer experience, reflecting its ability to thrive in the ever-changing retail landscape. Several club stores have been opened in the U.S. and the company is well-positioned for continued growth overseas, including in China.That said, the retailer’s stock is as expensive as it has ever been in its history. Costco has habitually paid special dividends every few years, and the stock gains on the news. A similar situation occurred when the retail giant recently announced a $15-per-share special dividend.

COST stock has seen extremely strong gains of 75% from levels of $375 in early January 2021 to around current levels, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in COST stock has been far from consistent. Returns for the stock were 51% in 2021, -20% in 2022, and 45% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that COST underperformed the S&P in 2022. Consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Consumer Staples sector including WMT, PG, and KO, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could COST face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

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It is worth pointing out that despite the pandemic and inflation, the business has grown strongly. Consumers loaded up on essentials in high quantities to keep costs low. In its most recent Q1, the company’s comparable sales, adjusted for gas prices and currency exchange, increased 3.9%. It should be noted that Costco makes a majority of its profits from its membership income, so comparable sales growth isn’t as important for it as it is for other retailers. In Q1, membership fee income was 8% higher than the prior-year period. Costco is likely due for a membership fee hike this year, which means its basic membership fee will go from $60 to $65 a year and its executive membership will go from $120 to $130. Card members increased by 7% over last year in the first quarter and the renewal rate remained strong, at 92.8% in the U.S. and Canada, while the worldwide rate came in at 90.5%. This high renewal rate not only ensures a steady stream of revenue from membership fees but also increases the lifetime value of each customer, thereby boosting overall profitability. We need to keep an eye on this metric when calculating Costco’s long-term growth potential. Also, Costco currently boasts nearly $18 billion in cash, cash equivalents, and short-term investments. Its long-term debt is only $7 billion, so Costco has a net cash position on its balance sheet. 

We have revised COST’s valuation to $653 per share, based on a $15.73 expected EPS and a 41.5x P/E multiple for the fiscal year 2024 – in line with the current market price. We forecast COST’s Revenues to be around $255 billion for the fiscal year 2024, up 5% y-o-y. The stock’s current valuation at 46 times earnings is much higher than the 25 to 30 P/E range before the pandemic, which means investors could see a couple of scenarios play out. There is the possibility that the shares could decline until the valuation falls in line, especially if a recession sinks the broader stock market. Alternatively, the stock may oscillate as earnings grow and valuations catch up.

It is also helpful to see how its peers stack up. Check out how COST’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Jan 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 COST Return 1% 1% 317%
 S&P 500 Return 0% 0% 112%
 Trefis Reinforced Value Portfolio -3% -3% 591%

[1] Month-to-date and year-to-date as of 1/10/2024
[2] Cumulative total returns since the end of 2016

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