Costco (COST) shares, trading hesitantly in positive territory Wednesday, are offering investors an opportune buy with its surprise fourth-quarter earnings beat, hinting that the wholesale retailer can weather economic turmoil.
COST stock, already a darling among analysts with a slew of buy ratings, reported net income for the fourth-quarter was $767 million, or $1.73 per diluted share, compared to $697 million, or $1.58 per share, last year and above the Street view of $1.66 per share.
Costco reported net sales of $34.99 billion, up 1% from $34.75 billion a year prior but below the Street expectations for $36.57 billion, according to Capital IQ estimates.
Since it also operates gas stations, Costco is blaming low gas prices and a weaker dollar for less-than-stellar sales. Without those factors its annual revenue from its U.S. stores rose 7% year-over-year, which the wholesaler reported earlier this month and a strong indication that demand for Costco’s offerings is trending firmly higher with the increased consumer spending habits as of late.
COST stock has proven to have momentum over the past year, with the stock up 14.5%, but off its February peak of $156.85. The Issaquah, Wash.-based firm, with a market cap of $62.97 billion, currently operates 686 warehouses, including 480 in the U.S. with an annual membership-only policy.
With its newly reported 10% increase in Costco earnings and plans to add more gas stations, the retailer is proving it has the business acumen to drive results even as economic factors hamper revenue.
Costco stock’s price-to-earnings ratio of 27.5 is generally on par with its peers, including PriceSmart (PSMT), with its P/E ratio of 26.5. Although, it’s admittedly less competitive on price than Big Lots (BIG), which boasts a ratio of 18, and also less competitive than Target (TGT), which sells much of the same type of merchandise at 17.4 times earnings.
Based on these figures, it seems like COST stock is fully priced, but the reality is it has plenty of room to run.
As retail stocks have benefited from positive trends in consumer spending, Costco is in an especially ideal position. Because Costco caters to consumers who make infrequent but large purchases, instead of impulse buys, Costco can keep its inventory costs down.
Plus, Costco profits from its membership fees without having to shoulder the burden of delivery service costs, as Amazon’s (AMZN) Amazon Prime does. Costco derives about 2.2% of its annual revenue from membership fees, according to Trefis, which analyzes a company’s valuation.
Costco’s notoriously low prices and focus on consumer staples give the company a grounded stock that can weather potential tumultuous changes in the economy.
However, investors should also be aware that COST stock is vulnerable to an increasingly aggressive online retail environment, including Target’s announcement Wednesday that it will match the online prices of 29 of its competitors, including Costco. But, of course, Costco has plenty of room to make its own counter-offer deals.
So while COST stock may seem to be fully valued, and as the online retail sector heats up, COST stock is still well positioned to reap gains in the years to come. And with shares enjoying positive momentum as of late, now is an ideal time to buy COST stock for the long-term.
As of this writing, Rebecca McClay did not hold a position in any of the aforementioned securities.
