Solid Earnings and Potential Growth Make Costco a Moderate Buy

Key Points

• Costco has favorable upside and projected earnings growth.
• COST may be undervalued, even with an extremely high price-to-earnings ratio (P/E) of 38.79.
• Costco currently has a "moderate buy" rating.

More than two dozen analysts offering 12-month price targets for Costco Wholesale (NASDAQ: COST) have arrived at a median price forecast of $562.50. This is on the higher side of the $455 to $650 range. The stock has an all-time high of $604.96 (April 7, 2022), which means the stock could register a new high this quarter.

Analysts have given COST a "buy" rating. The premium now is much higher than in 2009, when the stock began a steady climb from $48.52 and picked up momentum in early December of 2018. Since then, the stock value has increased more than tenfold.

Unfortunately, the stock has been more volatile lately. The 52-week range may not seem like a big margin due to the stock's consistent upward momentum, but the relative high and low are only about a month apart. The 12-month high is $612.27, which registered on April 7, 2022. It fell to its 12-month low of $406.51 on May 20, 2022. The stock's current mid-November value is $526.72, nearly identical to the $522.87 registered one year ago.

Consistent Earnings Parallel Sales

Costco's most recent earnings reports reflect a strong business model and a generally happy workforce. Costco pays its people well but maintains attractive pricing, a solid combination for steady growth. All of this is reflected in the company's steady and mostly consistent earnings growth.

For example, Costco beat the earnings target three out of the last four quarters, meeting the $3.04 estimate in Q3 of 2022. In Q1 of this year, actual earnings ($2.97) beat the range high ($2.91). Actual earnings increased from $2.97 in Q1 to $4.20 in Q4. Similarly, annual earnings have steadily increased, beating the estimate every fiscal year until 2022 as well. Annual earnings came in at $8.19 in 2019, beating the estimate. Reported annual earnings came in a penny shy of the $13.15 estimate in 2022.

Sales follow the same kind of upward trend. Quarterly, sales increased incrementally since Q1 of 2022, when Costco registered sales of $50.4 billion (just missing the range high of $50.7 billion) to $52.6 billion in Q3. However, sales made a big jump in the most recent quarter to $72.1 billion, beating the estimate in the process. On an annual basis, the numbers suggest even more stable growth, increasing from $152.7 billion in 2019 to $227 billion this year.

Costco's Competition: Breathing at its Heels

Costco Wholesale has a unique membership business model that operates in the brick-and-mortar retail space. This makes it well positioned to succeed. The numbers certainly support this story. Costco's current share price ($565.54) nestles perfectly in the middle of its 52-week range. Analysts gave the stock an 11% upside and projected for earnings to grow more than 9.8% in the long term.

These numbers easily make Costco a comfortable and undervalued pick this week, as does a solid price-to-earnings ratio (P/E) of 38.79 and 0.99 price-to-sales (P/S) ratio. 

Undervalued Walmart (NYSE: WMT) has a P/S ratio of 0.66. That is about all they have in common, as WMT has a smaller upside potential (7.2%) and a 0.52 beta value nearly twice that of Costco.

Target (NYSE: TGT) remains another Costco peer in the retail space. Target stock is near the bottom third of its 52-week range but its other metrics have more stability. Analysts have rated TGT stock as healthy, with an upside potential of just 2.6%. This may seem low, but analysts project that Target could see nearly 47% earnings growth over the next 12 months. TGT has been a beacon of stability with a P/E of 20.4 and a beta of 1.02. 

Finally, we have the original online warehouser, Amazon (NASDAQ: AMZN). Near the bottom of its 52-week range, the stock is also a "moderate buy." Although it does not perform at its best, analysts have assigned the stock a notable 55.4% upside potential. Furthermore, a projected earnings growth of more than 180% certainly implies steady growth, though a 1.23 beta means a little more volatility could be disruptive.

At the end of the day, analysts generally agree that all four of these stocks qualify as "moderate buys."