Costco Wholesale (COST), popularly referred to as just Costco, is a well-known big-box retail store chain that sells items in bulk and offers household products and groceries at a discount.
When consumers anticipate unfavorable world events that might hinder supply-chain activity, such as the COVID-19 pandemic, theyâll frequently panic-shop at Costco. The company has evidently benefited from some unfortunate recent developments in the world, and that will likely limit future upside potential. Costco has a high valuation and a low dividend yield. Iâm neutral on COST, and it doesnât look like a good month for investors to go shopping on Costco stock.
Costco and the Dock Workersâ Strike
Dock workers on Americaâs East and Gulf Coasts officially walked off their jobs and began striking on October 1. However, their contracts with employers ended in late September, and consumers used this as an opportunity to stock up on essential goods. Many people remember what occurred near the onset of the COVID-19 pandemic, when citizens rushed to purchase large supplies of products like toilet paper out of fear they might encounter empty shelves later on.
While the dock workersâ strike has already been resolved, and will undoubtedly take a toll on the U.S. economy, it certainly gave a boost to Costco sales in September. The early part of October likely featured much of the same. Investors should keep this in mind as they assess Costcoâs results.
Costco Acknowledges âAbnormalâ Shopping Activity
Amidst the panic shopping that likely occurred in anticipation of the dock workersâ strike, Costco management acknowledged a shopping activity boost in September due to the onset of Hurricane Helene. Specifically, Costcoâs management cited âabnormal consumer activity associated with Hurricane Helene and port strikes.â Hurricane Milton might âmake it rainâ again for Costcoâs top line in October, but this is also another one-time event. Investors probably shouldnât count on such events providing a boost to Costco indefinitely.
Breaking down Costcoâs sales numbers for the âretailâ month of September (the five weeks ended October 6, 2024), the companyâs net sales jumped 9% year-over-year to $24.62 billion. Moreover, during that same timeframe, Costcoâs U.S. comparable-store sales increased 6.5% and the companyâs e-commerce sales surged 22.9%.
The spike in e-commerce sales is eye-catching, but itâs easy to imagine shoppers ordering essential household goods online as soon as they heard about the port strike and hurricane developments. I canât expect that Costco will maintain a ~23% growth rate in e-commerce sales for much longer.
Costcoâs High Valuation and Low Dividend Yield
Costco investors may have already gotten ahead of themselves, in my view, as COST stockâs valuation is quite high. Alarmingly, Costcoâs trailing 12-month adjusted (non-GAAP) P/E ratio is 55.1x. In contrast, the sector median P/E ratio is 17.8x and Costcoâs five-year average P/E ratio is 41.2x. Itâs entirely possible that all current and anticipated benefits of the aforementioned events have been priced into COST stock.
Income-focused investors also arenât served very well by Costco stock at the current market price. The average forward annual dividend yield for the Consumer Cyclical Sector is around 1%, versus about 0.5% for COST. Investors wonât be getting rich from Costcoâs quarterly dividend distributions. Regardless of whether youâre a value-focused investor or a high yield seeker, Costco stock probably doesnât look attractive right now.
Digging Deeper into Costcoâs Sales Performance
Drilling down into Costcoâs recent sales performance, we can observe that the company reported fourth-quarter Fiscal Year net sales of $78.2 billion. Thatâs only a 1% increase when compared to the $77.4 billion in net sales that Costco generated in the year-ago quarter.
As weâll discuss below, analysts are generally only lukewarm about COST stock. This assessment, despite Costcoâs impressive-looking September performance, makes logical sense to me. In light of the companyâs lackluster fourth-quarter net sales growth, one could suspect that September was just an outlier.
Yellow Flags in Costcoâs Financials
Moreover, after checking the TipRanksâ Financials page for Costco, we will discover some potential cautionary signals. Costcoâs cash and cash equivalents position dwindled from $15.23 billion in the year-earlier period to $11.14 billion in the quarter ended August 2024. During that time frame, Costcoâs free cash flow decreased from $2.17 billion to $1.38 billion, which is a notable decline. The deteriorating cash picture further supports my neutral position on COST stock.
The company is also up against tough comps, and it will be interesting to see how investors react to substantially lower sequential results. Per TipRanksâ earnings page for Costco, we can see an EPS expectation of only $3.78 for the current quarter. That represents a significant drop from the recent quarterâs $5.29 EPS result. Thatâs another reason to be cautious on COST stock at the current time, in my opinion.
Is Costco Stock a Buy, According to Analysts?
On TipRanks, COST comes in as a Moderate Buy based on 16 Buys and seven Hold ratings assigned by analysts in the past three months. There are no current Sell ratings. The average COST stock price target is $938.95, implying about 5% potential upside.
If youâre wondering which analyst you should follow on COST stock, the most profitable analyst covering the stock (on a one-year timeframe) is Laura Champine of Loop Capital Markets, with an average return of 30.09% per rating and a 96% success rate.
Conclusion: Should Investors Consider Costco Stock?
Currently, COST stock doesnât seem very appealing based on value or dividend yield measures. The companyâs September retail revenues were very impressive, but itâs hard to imagine that the market hasnât already factored the positive numbers into the current valuation. Future results are also susceptible to a dearth of one-time events that have boosted Costcoâs business lately.
As a consumer, I might shop at Costco to stock up on essential items, but as an investor I donât feel any draw to investing on COST stock right now. For the time being, Iâm staying neutral on shares of Costco.
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