Costco Wholesale Can Hit New Highs; A Rebound Is Coming

Key Points

• Costco had an industry-leading quarter, leading the analysts to raise their price targets. 
• The stock is pulling back, setting up a buy-the-dip opportunity. 
• Cash flow and dividends are safe; another year of solid growth is on deck for fiscal 2025.

Costco Wholesale NASDAQ: COST is highly valued because the pullback in price action provides a strategic opportunity to capitalize on it. The reason is evident in the results and in the analysts' increased price targets. Among the details are industry-leading growth, market share gains, outperformance, and the promise of continuing value for its members and shareholders. That value includes its return on capital, dividend, and cash flow. That’s why the pullback in price action is a good thing that investors should take advantage of.

Costco Has Strong Quarter; Momentum Builds

Costco had a strong quarter and built momentum with revenue of $58.52 billion, growing 9.1% compared to last year. That is up from last year’s 2% and last quarter’s 5%, putting it in the lead compared to its leading competitor, Walmart NYSE: WMT. The strength is driven partially by a calendar shift, but the shift is offset by fewer weeks in the quarter; the net result is that revenue outpaced consensus by 1000 basis points and will likely remain strong this year. On an adjusted basis, US comps are up 6%, Canada 7.4%, International 8.5%, and systemwide eCommerce 20.7%. 

Among the signs of strength are membership fees and renewal rates. Membership fee revenue grew by 7.5% in the quarter, suggesting that revenue growth will continue at a high-single-digit pace in Q2. Renewals are running at 95.2%, which the company is happy with. The conference call was interesting because CFO Gary Millerchip says a membership fee increase is coming, but the timing is still questionable. The company is satisfied with the current rate and remains committed to delivering value to consumers. 

Margin stands out in the report. The company reported a 29% increase in net income and generally accepted accounting principles (GAAP) earnings that easily cleared the high bar set by analysts. The $3.78 in GAAP earnings beat by a dime, leading the analysts to raise their price targets. 

Analysts Lead Costco to a New High

Costco shares are down following the report, but the rebound should begin soon. All of the more than a dozen analyst revisions tracked by Marketbeat following the release include upward movement in the price target. The consensus estimate lags behind the stock price, but the new range is leading it higher, so it should support the market. Many revisions put Costco in the range of $850 to $880 or about 7.5% to 10% above the current action. A move to that level would be a new all-time high. The analysts' chatter includes support for the company’s commitment to quality-for-value and praise for its market-leading performance and market share gains. 

Among Costco's opportunities is its store count growth. Its topline growth is fueled by an increasing store count and comp-store gains, and plans for store count growth are robust. The company says it can add 27.5 new stores at the mid-point of guidance per year, which will sustain a near-3% growth pace for the next few years. Along with the membership growth, results should track at the high end of the expected range and support upward movement in the price action over time.

Costco Pulls Back to Critical Support, Rebound Imminent 

Costco's price action returned to a critical support level coincident with the previous all-time high. That level should provide strong support for the market and lead to a rebound. The risk is that price action will fall below this level, near $790, and confirm it as resistance. The stock could correct another 5% to 10% in this scenario to bring the high 50X valuation back into a more reasonable zone. The stock tends to trade well above its peers, but at this level, it is more than double the value of Walmart, which is also gaining market shares and leading in retail.