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Nicholas Kitonyi
Nicholas Kitonyi
Articles (296)  | Author's Website |

Costco Wholesale: A Look Beyond the Earnings

Shares are down after earnings report

May 31, 2019 | About:

Shares of Costo Wholesale Corp. (NASDAQ:COST) fell 1.42% in extended trading on Thursday after the company reported third-quarter 2019 results. 

Costco, whose stock is up approximately 18% year to date, operates a chain of membership-only warehouse clubs in the U.S. and internationally.

For the most recent quarter, Costco posted total revenue of $34.7 billion, which was up 7.4% from the prior-year quarter and was relatively in line with expectations. Regardless, shareholders took note of its membership revenue miss, which came in at $776 million compared to the street estimate of $782 million.

Costco’s earnings of $2.05 per share beat estimates by 23 cents, but this was largely due to benefits from a $73 million non-recurring tax item that boosted earnings by 16 cents per share.

The retail giant is currently on an expansion drive. Last year, it opened 21 new stores around the world and plans to open a similar number this year.

With China being one of the primary locations Costco is targeting for new warehouses, this could give it access to one of the biggest markets in the world. There are growing concerns, however, that the U.S.-China trade tensions could put those plans on hold.

Costco’s Mexico outlets could also be facing an uncertain future following President Trump’s tweets, which revealed the U.S. plans to apply a 5% levy on all Mexican products entering the country. This could create trade tension between the two countries.

Nonetheless, Costco’s business appears to be performing well, albeit with modest growth rates. The company’s largest market, the U.S., recorded 5.5% growth in comparable sales, while Canada registered growth of 5.1%. International sales were up 6.9%.

The company also recorded tremendous growth in e-commerce sales, which increased by 19% from the same period last year. 

As part of its overall growth strategy, Costco plans to intensify its investments in e-commerce and grocery expansion as well as depot infrastructure improvement and IT modernization. With over $7 billion in cash and cash equivalents as of May 12, 2019, the company appears to be in a strong financial position to execute this plan.

From a valuation perspective, Costco appears to be more expensive than its peers. The retailer currently trades with a forward price-earnings ratio of 28.38, which is significantly higher than BJ's Wholesale Club Holdings Inc.’s (NYSE:BJ) ratio of 15.20,  The Home Depot Inc.’s (NYSE:HD) multiple of 17.23 and Target Corp.’s (NYSE:TGT) forward price-earnings ratio of 12.92.

Even when we factor in growth prospects, Costco still trails its peers with a price-earnings to growth ratio of 2.85. Target and BJ’s Wholesale trade with PEG ratios of 1.25 and 1.27, while Home Depot trades with a ratio of 2.03.

Therefore, while Costco presents an interesting growth story, driven by its investments in digital platforms and continued global expansion, investors will be weighing their options by comparing the company with its rivals. Currently, it looks like its peers have more compelling value propositions.

In summary, Costco’s post-earnings drop appears to be the perfect opportunity to buy, but investors may want to dig deeper and try to assess whether there are better options in the market. As for current shareholders, given Costco’s dividend history and yield, holding on could be a wise decision. The company’s payout ratio of less than 30% also suggests there is room for dividend growth.

Disclosure: No positions in the stocks mentioned.

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About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

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