Costco (COST) has cultivated a cultlike following. Many of its shoppers swear by it. Most retailers struggle to stay alive under the heat of e-commerce competition. Yet Costco growth remains strong due to its original business model and die-hard customer base. Is it time for investors to climb on board Costco stock?
Costco might be the only retailer selling both $1.50 hot dogs and $250,000 diamond rings under the same roof. You can also buy a tank of gas, a chicken coop or a funeral casket there while you’re at it. This is a huge part of Costco’s allure. It sells a large variety of items inside a chain of nondescript warehouses and charges customers a $60 membership fee just to get in the door.
Costco earnings, which were reported Dec. 10, showed sales growth of 17% year over year. The warehouse retailer reported annual earnings of $8.20 in 2019 and $9.85 in 2020 showing an over 20% increase year over year. Total Costco cardholders rose to a record high 98.5 million in 2019, up from 94.3 million in 2018.
Additionally, November sales for Costco, which were reported on Dec. 5, showed its revenue increased by 15.1%, on a year-over-year basis. More over, same store sales increased 13.4% year over year, with double-digit gains in all of the Costco’s major regions. Costco provides many of the basic supplies and food items families need during the ongoing Covid-19 quarantine and the company has noted a spike in demand due to the pandemic.
However, the company’s November sales fell a little bit short of analyst estimates. This contributed to a pullback in the stock’s price in recent weeks. Costco e-commerce sales also jumped 70.9% on a comparable basis for the month of November.
Record Membership Renewals
Membership renewal rates reached a record high of more than 90.7%, showing the business’s appeal is as strong as ever. Costco’s buy-in-bulk branding makes it an ideal place for consumer stockpiling amid coronavirus quarantines. This points to sustained surge in foot traffic and sales for the major retailer.
Sales increased to $43.2 billion for the quarter ended in November, exceeding analysts expectations. Shares of Costco have gained 24% year to date, beating the S&P 500’s gain of roughly 14% through Dec. 22. The stock is also slightly outpacing the price performance of competitor Walmart (WMT), which shows a 23% increase.
Costco Stock: Leader or Laggard?
Not surprisingly, Costco stock has been one of the top-performing large caps in the S&P 500. The stock has risen over 80% within the past two years from 200 to 360 a share. However, some investors wonder if the stock is overvalued at current levels. They cite a price-to-earnings ratio at nearly 33 and remains near its highest levels in over a decade.
Still, valuation isn’t much of predictive factor for growth-stock performance, and some analysts feel the recent developments in the wholesaler’s business will give Costco naysayers a run for their money.
Costco Stock Technical Analysis
Costco topped the 363.77 buy point of a flat base in early October. But the stock has erased all gains from that entry. The stock is now below support at the 50-day moving average. A solid bounce would have set up another possible buy area.
Costco’s relative strength line has been weakening in recent weeks and has ultimately been lagging since March. The RS line, which tracks a stock’s performance vs. the S&P 500 index, had been trending sharply higher since the start of February.
On the positive side, total fund ownership in the stock, at 2,773 funds for the August-ended quarter, has grown steadily and consistently the past ten quarters. This indicates rising interest from institutional investors.
Costco Stock By Numbers And Ratings
On Dec. 31, 1985, Costco went public at a split-adjusted 27 cents a share. Roughly seven years later, it traded close to 20 a share — a 7,278% price increase. It prides itself on becoming the first company ever to grow its revenue from zero to $3 billion in less than six years, according to its website.
“Over the past decade, Costco stock has delivered (about) 6% comps and (about) 10% EBIT (earnings before interest and taxes) growth on average. This is a remarkable earnings algorithm for any retailer, especially at a time when many have been struggling against the onslaught of e-commerce,” Morgan Stanley analyst Simeon Gutman said in a recent note to clients.
Costco Earnings, 2020 Expectations
Revenue from Costco membership fees increased nearly 10% to $3.4 billion in 2019, from $3.1 billion in 2018. While membership fees only make up roughly 2.2% of total revenue, they account for more than 16% of Costco earnings.
Costco’s 26% annual return on equity for 2018 and 2019 shows it puts investors’ money to good use and reflects disciplined management. IBD’s CAN SLIM model looks for a minimum 17% return on equity for growth companies like Costco.
Costco currently operates 796 warehouses worldwide, in locations including Canada, the U.K., Mexico, Australia, Spain, China and Japan, among others. It has 552 warehouses in the U.S. and Puerto Rico.
Costco Stock: E-Commerce Edge
While the warehouse retailer’s digital presence is still new (2017) and sustained results remains to be seen, the company has an edge over competitors. Its massive ready-made database of nearly 100 million cardholder memberships will likely make for an easy transition to a database of loyal e-commerce customers.
Other discounters like Walmart require no special membership and therefore may struggle more with customer loyalty and retention in the online market.
Costco clearly remains a leader in its industry. In terms of fundamentals, the company is ahead of close competitors like Walmart, and fairly resilient against major e-commerce retailers like Amazon.com (AMZN). At the same time, the U.S. retailer will have to prove it can stick around for the long haul and continue to meet customers where they are — that is, online.
Is Costco Stock A Buy?
The best time to buy a stock like Costco is as it’s breaking out of a base chart pattern. Although shares of Costco are trading inside a buy area from an identifiable pattern, now is not an optimal time to add Costco to your portfolio. Shares maintain a low 43 RS Rating which should be a red flag to investors.
However, investors should definitely add this stock to your watchlist and keep a close eye. Once the stock’s relative strength improves, investors may consider adding shares of this leading stock if shares are within a proper buy range. Buying from breakouts of base patters will significantly reduce investment risk without giving up significant upside potential.
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