Costco Wholesale (COST), commonly referred to as just Costco, is a well-known large retail store chain that sells items in bulk and offers household products and groceries at a discount.
When consumers anticipate adverse global events that could disrupt supply chain activity, such as the COVID-19 pandemic, they often panic at Costco. The company has clearly benefited from some unfortunate recent developments in the world, and this is likely to limit future upside potential. Costco has a high valuation and a low dividend yield. I’m neutral on cost, and it doesn’t look like a good month for investors to shop Costco stock.
Costco and the dock workers strike
Dockworkers on America’s East and Gulf coasts officially quit their jobs and went on strike on October 1. However, their contracts with their employers expired in late September, and consumers used this as an opportunity to stock up on essential goods. Many people remember what happened near the beginning of the Covid-19 pandemic, when citizens rushed to buy large supplies of products such as toilet paper for fear of facing empty shelves later.
Although the dockworkers’ strike has already been resolved and will undoubtedly impact the US economy, it certainly gave a boost to Costco’s sales in September. The first part of October will likely see much of the same. Investors should keep this in mind as they evaluate Costco’s results.
Costco acknowledges ‘abnormal’ shopping activity.
Amid panic that likely occurred in anticipation of a dockworkers’ strike, Costco management acknowledged increased shopping activity in September due to the onset of Hurricane Helen. Specifically, Costco management cited “abnormal consumer activity associated with Hurricane Helen and port strikes.” Hurricane Milton may once again “make it rain” on Costco’s top line in October, but this is also another one-time event. Investors probably shouldn’t rely on such events providing a boost to Costco indefinitely.
Breaking down Costco’s sales numbers for the “retail” month of September (the five weeks ending October 6, 2024), the company’s net sales jumped 9% year-over-year to $24.62 billion. Furthermore, during the same time frame, U.S. comparable store sales increased 6.5% and the company’s e-commerce sales rose 22.9%.
The spike in e-commerce sales is eye-catching, but it’s easy to imagine shoppers ordering essential household goods online as soon as they heard about the port strike and hurricane developments. I can’t expect Costco to maintain its 23% growth rate in e-commerce sales for much longer.
Costco’s high valuation and low dividend yield
Costco investors may have already made a move, in my view, as COST’s stock valuation is so high. Alarmingly, Costco’s trailing 12-month (non-GAAP) adjusted P/E ratio is 55.1x. In contrast, the industry’s average P/E ratio is 17.8 times and Costco’s five-year average P/E is 41.2 times. It is entirely possible that all of the current and expected benefits of the above events will be priced into COST stock.
Income-focused investors are also not well served by Costco stock at the current market price. The average annual forward dividend yield for the consumer cyclical sector is about 1%, versus about a 0.5% cost. Investors won’t get rich from Costco’s quarterly dividends. Regardless of whether you’re a value-focused investor or a high-yield seeker, Costco stock probably doesn’t look attractive right now.
Dive into Costco’s sales performance
Digging deeper into Costco’s recent sales performance, we can note that the company recorded net sales for the fiscal year in the fourth quarter of $78.2 billion. That’s just a 1% increase compared to the $77.4 billion in net sales Costco generated in the same quarter last year.
As we’ll discuss below, analysts are generally lukewarm on COST stock. This assessment, despite Costco’s impressive September performance, makes sense to me. In light of the company’s lackluster net sales growth in the fourth quarter, one might suspect that September was just an anomaly.
Yellow flags in Costco’s financial statements
Furthermore, after checking TipRanks’ financials page for Costco, we’ll spot some potential warning signs. Costco’s cash and cash equivalents position diminished from $15.23 billion in the prior-year period to $11.14 billion in the quarter ending August 2024. During this time frame, Costco’s free cash flow fell from $2.17 billion to $1.38 billion, a notable decline. . The deteriorating cash picture supports my neutral stance on COST shares.
The company also faces challenging comps, and it will be interesting to see how investors react to significantly lower sequential results. According to Costco’s Earnings TipRanks page, we can see an EPS forecast of just $3.78 for the current quarter. This represents a significant decline from last quarter’s result of $5.29 per share. This is another reason to be cautious about COST stock right now, in my opinion.
Is Costco Stock a Buy, According to Analysts?
On TipRanks, Cost comes in as a Moderate Buy based on the 16 Buy and seven Hold ratings assigned by analysts in the past three months. There are no current sale reviews. COST stock has an average price target of $938.95, which implies a potential upside of approximately 5%.
If you’re wondering which analyst you should follow for COST stock, the most profitable analyst covering the stock (on a 1-year time frame) is Loop Capital Markets’ Laura Champine, with an average return of 30.09% per rating and 96%. Success rate.
Conclusion: Should Investors Consider Costco Stock?
Right now, COST stock doesn’t look very attractive based on value or dividend yield metrics. The company’s retail revenue in September was very impressive, but it’s hard to imagine that the market hasn’t already factored in the positive numbers at the current valuation. Future results are also vulnerable to the scarcity of one-time events that have boosted Costco’s business recently.
As a consumer, I may shop at Costco to stock up on essential items, but as an investor I feel no pull to invest in COST stock right now. For now, I’ll remain neutral on Costco stock.
Disclosure
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