Case Study on Costco (COST) with Nobias technology
Summary
Costco posted earnings on Friday, with sales meeting Wall Street expectations and earnings-per-share beating consensus estimates.
However, COST shares fell by 4.26%, being pulled lower alongside the rest of the market during Friday’s macro sell-off.
Credible analysts aren’t dismayed by the recent results; their average price target for COST shares implies upside potential of approximately 17%.
Costco (COST) has been a relative bright spot in the market throughout 2022 for investors in the retail space, outperforming its peers and the broader indexes as well, on a year-to-date basis. However, as the market sold off on Friday, COST shares were caught up in the negative momentum. They fell by 4.26% on the same day that they reported fiscal 2022 Q4 earnings results which beat Wall Street expectations. And yet, after this weakness, the credible analysts that Nobias tracks remain bullish on shares, calling for upside potential of approximately 17%.
COST Sep 2022
Derek Lewis, a Nobias 5-star rated author, published an earnings preview report at Zacks.com last week. Lewis began by saying, “Costco Wholesale sells high volumes of foods and general merchandise (including household products and appliances) at discounted prices through membership warehouses.”
In today’s high inflationary environment with the threat of recession looming, the market has been bullish on COST’s operations. Lewis commented on the stock’s strong 2022 performance, noting, “Costco shares have been notably defensive in 2022, declining nearly 11% and vastly outperforming the S&P 500’s decline of 18%.” That’s especially been the case recently, as we’ve seen an uptick in negative volatility.
Lewis continued, “Over the last three months, COST shares have continued on their market-beating trajectory, increasing 13% in value vs. the general market’s climb of 6.3%.” Because of its strong share price performance, Lewis points out that COST shares trade with a relatively high premium attached to them. He wrote, “COST shares trade at steep valuation multiples – the company’s 35.1X forward earnings multiple is undoubtedly expensive, representing a steep 42% premium relative to its Zacks Sector.”
Coming into the quarter, Lewis said that, “The Zacks Consensus EPS Estimate of $4.11 suggests Y/Y earnings growth of an impressive 5.4%.” He also touched upon the company’s top-line expectations, saying that COST is expected to generate “a commendable double-digit 15% Y/Y uptick in revenue.” What’s more, Lewis points out that Costco has a consistent history of beating analyst estimates, meaning that the company’s Q4 results could be even stronger.
Regarding Costco’s past success, he wrote, “The wholesaler has exceeded the Zacks Consensus EPS Estimate in eight of its previous ten releases.” “Top-line results paint the same positive story,” Lewis continued, “Costco has registered eight revenue beats over its last ten quarters.”
In conclusion, Lewis noted, “Shares are a bit expensive, with the company’s forward P/E ratio sitting well above its Zacks Sector average.” And although he expects to see relatively strong fundamental growth during the quarter, he highlights Zack’s “Hold” rating on shares.
When Costco published its Q4 results on Friday, September 23, 2022, Russell Redman, a Nobias 4-star rated author, was on the beat, covering the results in an article published at supermarketnews.com. Redman wrote, “The Issaquah, Wash.-based warehouse club chain posted double-digit net and comparable sales growth for its fiscal 2022 fourth quarter and full year, while topping Wall Street’s consensus earnings-per-share forecast for both periods.” He continued, “Net sales came in at $70.76 billion, up 17.5% from $61.44 billion a year earlier”.
Regarding COST’s top-line results, Redman stated, “Total comparable sales in the quarter climbed 13.7% from a year ago (10.4% adjusted, excluding fuel and FX), reflecting gains of 15.8% in the United States (9.6% adjusted), 13.4% in Canada (13.7% adjusted) and 2.9% internationally (11.3% adjusted). A year ago, Costco reported that comp sales increased 15.5% (9.4% adjusted), including an increase of 14.9% in the U.S. (10.3% adjusted).”
Redman also touched upon COST’s full-year results, stating, “For the 2022 fiscal year, net sales came in at $222.73 billion, up 16% from $192.05 billion in fiscal 2021, when the company rang of a 17.7% gain.” He continued, “Full-year comp sales for the 52 weeks rose 14.4% overall (10.6% adjusted, excluding fuel and FX), reflecting upticks of 15.8% in the U.S. (10.4% adjusted), 15.2% in Canada (12.1% adjusted) and 6.6% internationally (13.4% adjusted). In fiscal 2021, Costco recorded comp sales growth of 16% overall (13.4% adjusted), including a gain of 14.8% in the U.S. (13.6% adjusted).”
Redman highlighted Costco’s continued eCommerce growth, writing, “Fiscal 2022 e-commerce sales surged by 10.1% (10.4% excluding FX) atop of growth of 44.4% (42.6% excluding FX) on a comparable basis in fiscal 2021.”
Moving onto the bottom-line, Redman said, “Costco’s 2022 fourth-quarter net income totaled $1.87 billion, or $4.20 per diluted share, compared with $1.67 billion, or $3.76 per diluted share, a year ago.” He also remarked, “For the full 2022 fiscal year, net earnings were $5.84 billion, or $13.14 per diluted share, versus $5.01 billion, or $11.27 per diluted share, in 2021.”
Redman quoted Costco’s Chief Financial Officer Richard Galanti, who said, “In terms of the Q4 comp-sales metrics, traffic or shopping frequency increased 7.2% worldwide and was up 5.2% in the U.S. Our average transaction or ticket was up 6% worldwide and 10.0% in the U.S. during the fourth quarter.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Galanti was also quoted, discussing the inflationary headwinds that Costco faced during the quarter. The executive said, “They’re still present, but we are seeing just a little light at the end of the tunnel. And if you recall in the third quarter, we indicated that price inflation overall was about 7% plus for us. For the fourth quarter, and talking with our merchants, the estimated price inflation overall was about 8%, a little higher on the food and sundries side, a little lower on fresh foods, and both higher and lower on the nonfood side.”
Overall, Redman notes, there is still strong demand for the Costco brand. He said, “Membership fee income advanced 7.5% year over year (10.5% excluding the impact of foreign exchange rates) to $1.33 billion. Total paid member households rose 6.5% to 65.8 million, and the total cardholder count grew 6.5% as well to 118.9 million.” Redman said that Costco expects to open up another 29 stores in 2023, pointing towards continued growth ahead.
After this earnings beat, the credible analysts that Nobias tracks who cover COST shares remain bullish on the company’s prospects. 5 out of the 8 credible analysts that Nobias tracks believe that COST shares are headed higher. Right now, the average price target being applied to COST shares by these individuals is $545.75. After COST’s sell-off on Friday, shares trade for $466.40. Therefore, relative to the credible analyst average price target, COST shares appear to offer upside potential of approximately 17%.
Disclosure: Nicholas Ward has no COST position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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