Highly Valued Costco Is Still A Buy

Costco Is The Crown Jewel Of Membership Club Warehouses

Costco NASDAQ: COST is by far the most richly valued of the major players in the membership club category. The stock is trading at 38X this year's and 35X next year's earnings compared to much lower valuations for its closest peers. The most directly comparable peer in our sphere of coverage is BJ's Wholesale Club. BJ's Wholesale Club is a much smaller operation but one that is growing very quickly and it trades at only 20X this year's earnings and 18.5X next year's earnings. Walmart, whose valuation includes the Sam's Club warehouse, trades at only 23 and 22 X earnings while Latin America-based PriceSmart trades at 24 and 23X earnings. But you get what you pay for. While the other stocks are all attractive investments in their own right, Costco is by far the best run and healthiest company of the lot. And it has double-digit gains in store for its share prices. 

Tailwinds Continue To Blow For Costco

Costco's Q4 results proved that strong tailwinds continue to blow for this company. While it has exposure to the growing global supply chain issue, many of those issues are mitigated by its growing logistical Network. The company reported $62.68 billion in net consolidated revenue for the quarter which is good for a gain of 17.4% over last year and this is on top of a difficult comp. Revenue grew 12% last year, and beat the consensus by 200 basis points, to drive two-year growth above 38%. On a comp-store basis ex gasoline, comps are up 15.5% across the network. Sales in Canada were strongest and up 19.5% while sales in the US were up 14.9% and the Other category 15%. E-commerce continues to be a contributor to results growing 11.2% over the past year.

The company experienced a slight decline in operating level margin worth 80 basis points but that was offset by sales strength. The company reported $3.76 in GAAP earnings to beat the consensus by $0.18 and $3.90 in adjusted earnings to beat the consensus by $0.36. The company didn't give any guidance but we expect revenue and earnings strength to persist into the fourth quarter at least.

Costco is a fortress above retailers

Costco's balance sheet is among the best on Wall Street. The company carries a fair amount of debt but is net cash with a low 1X leverage ratio and greater than 40x coverage. The company uses cash and cash flow to repurchase shares and pay a dividend to but neither is large. The dividend is worth about 0.7% with shares trading near $450 but there is an expectation for distribution growth. Costco has been incrementally increasing the dividend on an annual basis and is also noteworthy for its special dividends. The last special dividend was paid out last year and was worth $10 a share to shareholders or about 2.2% in yield. And don't forget that Costco is still investing in its growth 

The Analysts Are Pushing Costco Higher

The analyst sentiment in Costco is overwhelmingly bullish With 14 of the 20 current ratings a buy or better. At least 5 analysts have come out in the wake of the Q4 earnings report reiterating their ratings and all boosting their price target. Activity over the last 30 days has boosted the Marketbeat.com consensus price target by 5% and we think it will go higher. At $445 the consensus implies Costco is overvalued but the high price target and recent activity belie that notion. The high price target of $525 and consensus of the most recent 5 analyst targets suggest Costco has 20% to 25% upside ahead of it. 

The Technical Outlook: Costco Uptrend Remains Intact

The pre-market action in Costco suggests the uptrend is still intact. Price action is edging higher in the wake of the report maintaining support above the short-term moving average. This is a trend following move but one that has yet to be confirmed by the indicators so caution is still warranted. Assuming price action is able to maintain this level, we expect to see Costco consolidate before moving on to set another high.