Costco Moves Lower On Strong Results
The analysts are still on board the Costco (NASDAQ: COST) growth train even though it is obvious COVID-19 tailwinds are long gone and growth is slowing. The latest shout-outs come in the wake of the Q2 earnings report and include a reiterated Overweight rating from Wells Fargo and a price target increase from Telsey which rates the stock at Outperform.
Telsey’s new target is $615 compared to the Pricetargets.com consensus of $550 and the high target of $630. The Pricetargets.com consensus estimate assumes the stock is fairly valued at current price levels while the high target implies about 18% of upside. The takeaway for us is that sentiment is edging higher along with the consensus target. So long as that is in play we see price action holding firm if not trending higher.
The price action in Costco also has institutional support to help keep prices moving sideways if not higher. The institutions purchased a net $5 billion 2021 bringing their holdings up to 66% or so and they have been buying strongly in Q1 as well. So far in 2022, the first 8 weeks of the year, the institutions have purchased another 1% of the market cap and we think their buying will remain net bullish for the foreseeable future.
Costco Beats On The Top And Bottom Line
Costco had a good quarter with growth of 16.1% over last year. The $50.94 billion in revenue also beat the consensus by $0.390 billion but does not negate the fact that YOY growth is slowing on a sequential basis and the comps are going to start getting a lot tougher. The gains were made on strength in all regions and led by Canada. Canadian sales increased by 16% while the core US sales rose by 15.8%, International by 6.2%, and eCommerce by 10.2%.
Moving down to the bottom line, there is some strength here as well but once again the comps are about to start getting really difficult. Regardless, the $2.92 in GAAP earnings is up from last year’s $2.14 and beat by $0.13. This suggests the company is on pace to outperform for the year as well, the question is if sales growth will reaccelerate or continue to wane?
Highly-Valued, Low-Yielding Costco Is Not Our Choice
Costco is a fantastic company and an investment that has paid off well over the years but it may be played out, at least for now. Not only is the stock trading at a phenomenally high 41.5X earnings multiple and more than double the broad market average but it only yields 0.59% as well. Investors can buy the S&P 500 index tracking stock and do better on both counts. In our view, investors may wish to consider Walmart instead and get the added benefit of diversification into non-membership retail. Walmart trades at a much lower 20X earnings and in line with the broad market average while yielding 1.6%.
The Technical Outlook: Costco Confirms Resistance
Shares of Costco pulled back more than 2.5% in premarket trading and this is notable because it confirms resistance at a level where buyers should be driving prices higher. We’re talking about the $530 level and what should have been and may yet turn out to be the baseline of a double-bottom. If price action follows through on this move and moves lower during the regular session we see Costco shares retesting support at the $500 level or lower. If the market is able to get its feet back under it, however, we see price action moving sideways within a range until something changes with the market or the outlook.
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