Is this the Right Time to Buy Costco Stock?

Costco Stock

The vast majority—nearly half—of Wall Street analysts offering 12 month price target have given Costco Wholesale Corporation (NASDAQ: COST) a STRONG BUY rating. While the other 50 percent of analysts are split on the rating, they all seem to agree that now is a smart time to BUY Costco shares or that it could be the right time very soon. Effectively, COSTCO appears to have high return on equity, meaning that analysts have strong confidence in their ability to generate efficient return on equity.

That said, the 12-month consensus price target is $564.93 with an upside of 12.44 percent. This would put the target slightly higher in the estimate range, which has a low of $440 and a high of $610.

Earnings Consistently Outperformed the Past Year

Of course, the most telling metric for the health of any company is Earnings Per Share (EPS). For the current quarter, this measure is $4.17 on sales of $70.8B. Looking more closely at the breakdown, it is quite apparent that earnings has consistently performed well. In Q4 of 2021 analysts gave an EPS target range of $3.23 to $3.89 with a consensus estimate of $3.58. The stocks' actual earnings of $3.90 slightly beat the range.

The same is true for Q1 2022, when the $2.97 reported earnings beat the range by six cents. That said, it is easy to see that the expectations were much lower; understandably so, of course, as earnings tend to be lower, overall, after the holiday season.

By Q2 of 2022, the reported earnings of $2.92 did not beat the top of the range ($3.22), but did significantly best the consensus estimate ($2.76). Third quarter of 2022, the $3.04 reported earnings sat on the lower end of the range but only met the consensus estimate.

On annual basis, Costco earnings has consistently improved. While the $6.98 EPS reported earnings, in 2018, did not beat the estimate, it did register in the top half of the range. In 2019, things had already started improving, as the $8.19 reported earnings beat the estimate by a penny.

The climb continued in 2020 when the reported earnings of $9.23 beat not only the consensus estimate but also the top of the range, by a margin of about $0.26. By 2021, annual earnings had settled a little, with the reported earnings of $11.08 beating the consensus estimate but not the top of the range ($11.27).

Sales Growth is Also Consistent

Costco's overall comparable sales has demonstrated consistent growth for more than two years. As with so many others in the industry, they experienced a tiny hiccup during the early pandemic lockdowns but since then Costco has consistently presented upwards of 10 percent—or more—comps growth. While this is in line with overall comps growth in the US, the latter did slip to 9.6 percent in December of 2020 so Costco is, simply put, outperforming the rest of the industry. In fact, the last time Costco comps growth fell below 10 percent was in May of 2020, when it slipped to 5.4 percent.

Compared to competitor Walmart (NYSE: WMT), Costco has slightly better ratings. While analysts are split on Walmart as well, the highest recommendation analysts are giving is a moderate buy (with a 13.68 percent upside) and a higher percentage of analysts who feel it is only a HOLD for now. This puts the membership-based store ahead of the broad discount retailer heading into the busiest time of year for the entire industry.

While Costco share value has only met or beat the analysts consensus estimate a few times since the top of the year, the more important measure of their strength is that, overall, share value has been climbing steadily for more than a year. Aside from a dramatic dip in late May—slipping down to nearly $400 per share—Costco's volatility has mostly corrected upward.

Is the Momentum Too Strong?

At the same time, Costco's present price-to-earnings ratio is 31.7. At almost double the PE ratio of the rest of the entire S&P 500 (17.6 at the time of publication), this means investors are paying much more in some ways.

This is why some analysts are not as excited as others in terms of buying Costco stock—perhaps feeling it is overvalued right now—but considering how much volume the wholesaler has processed coming out of the pandemic, these concerns do not have as much weight as they could have with a lesser-performing stock.

In the latter part of the week, Costco Wholesale will hold a conference call to discuss their quarterly results. For now, then, the STRONG BUY rating is certainly one to pay attention to, if for no other reason than to see if it changes—and by how much—after the call. They report on September 23, 2022.

Companies in This Article:

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Costco Wholesale (COST)$517.47+1.0%0.79%38.33Moderate Buy$548.72
Walmart (WMT)$149.90+0.7%1.52%36.03Moderate Buy$166.13

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