This Is Another Buy The Dip Opportunity In Costco (NASDAQ:COST)

Costco Down On Solid Results

 The stay-at-home/pantry-loading names have been shedding value over the past two weeks. Names like Costco (NASDAQ:COST), Walmart (NYSE:WMT), Kroger (NYSE:KR) and BJ’s Wholesale Club (NYSE:BJ) are down 8% to 10% in what looks like a massive rotation out of the sector. You can rest assured that, while other stock sectors are coming into vogue, that consumer names like these are not out for the count. Quite the opposite in fact. Costco’s calendar Q3/fiscal Q4 results were not only strong, they beat consensus estimates and accelerated from the previous quarter. That’s right, Costco’s results accelerated from the previous quarter.

A Strong Report From Costco

Costco’s strength was no surprise, not really. The company delivers regular monthly updates that foreshadowed the Q4 results only the analysts were too cautious The $53.38 billion reported is $1.02 billion more than expected and up 12.4% from the last year. The margin of error is about 200 basis points which isn’t much relative to other reports I’ve seen recently but quite a lot considering how much information the analysts had to work with.

“We’ve kept you up-to-date in our monthly sales calls on the impacts from the pandemic as we've been able to identify those. Overall merchandise sales in the core, core being food and sundries, hardlines, softlines and fresh, as well as pharmacy have all been strong, while sales in our ancillary, other ancillary and travel businesses, though now open have been soft,” said CFO Richard Galanti.

Comps came in at 14.1% but, when stripped of volatile gas and F/X, came in at a mere 13.6% eCommerce, the undisputed king of the pandemic, grew by 91.3%. Membership fees, a forward indicator of revenue and profits, grew a solid 5.0% over the last quarter to $1.106 billion. Also of note, the company opened 8 new warehoused in the quarter which is good for at least 1.0% of sustainable net revenue growth. Looking at the bottom-line, results were equally good. GAAP EPS came in at $3.13 or 10% above forecast with roughly 40% of cash-flow unrestricted.

Costco’s Safe Dividend Comes At A Price

In terms of value, Costco is not cheap. Trading at roughly 35X this year’s and 33X next year’s earnings it is the most highly-valued name in the group. Walmart is the second-highest valued trading at 25X earnings with BJ’s and KR trailing that by a wide margin. Both Walmart and Kroger pay a better yielding dividend as well, which makes Costco quite a pricey stock indeed. Kroger yields close to 2.15% compared to Costco’s 0.8% while Walmart is closer to 1.5%. In both cases, the balance sheets are comparably well-managed with ample room for increases.

Costco has a history of increases, only two years, and a high 15% distribution CAGR so it’s likely to post another big increase in the coming year. On the flip side, Kroger has been increasing its yield for 14 years and Walmart is a near-Dividend King. When it comes to growth, neither are posting quite the same numbers as Costco but they’re close. Close enough I think they’re the better buys.

The Technical Outlook: Costco Is A Good Stock, But It’s Expensive

Costco issued a nice report, don’t get me wrong, but I think it better to hold off on this one, at least for a while. With both Walmart and Kroger offering a better value, better yield, and comparable growth I view them as the better buys for today. That said, Costco is moving lower in the premarket action and trading at levels that could offer support. The price is below the short-term moving average which I consider to be a bearish sign. If the price action does not regain the upper side of the 30-day EMA before the close shares of Costco could be in for a deeper decline. If they do I would target the $330 and $320 levels for possible entries.