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Costco Is an Absolute Buy. Here’s Why.

Costco Stock - Costco Is an Absolute Buy. Here’s Why.

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After pulling back in the first two sessions of April, Costco (NYSE:COST) stock is rebounding on Tuesday, on above-average volume. Some of the upside is attributable to the strength seen across the discount retail space. Costco stock’s stretched valuation may be a deterrent for potential buyers. All the same, the defensive nature of the company’s business makes it a must-have in a portfolio, especially amid the current fluid economic conditions.

It appears that Costco stock is continuing momentum from the past month. Costco stock outperformed the broader market in March. The shares of the membership-only warehouse retailer have so far rallied about 10% in the last month compared to a more modest 4.8% gain for the SPDR S&P 500 (NYSEARCA:SPY).

Costco reported nearly 16% year-over-year revenue growth for the second quarter of fiscal year 2022 that ended Feb. 13. The bottom line came in at $2.92 per share, comfortably beating the consensus estimate of $2.74 per share. Comparable store sales, after adjusting for fluctuations in gasoline prices and forex, came in at a strong 11.1%.

The momentum appears to be continuing into the running quarter. Adjusted comps were at 10.6% in the four-week period ended February 27.

Costco is an evergreen performer. Good times or bad times, there is ever-present demand for its product categories that include essentials. At the end of the second quarter that ended in February, the company had 828 warehouses worldwide and it boasted of 114.8 million cardholders. Membership fees alone fetched the company $3.88 billion in revenues in the previous fiscal year and $967 million in the second quarter.

The average analysts’ rating on Costco stock is a buy, according to TipRanks. However, the average price target of $583.73 suggests only a modest upside from current levels. The skepticism may have to do with Costco stock’s relatively expensive valuation. The stock is trading at a forward price-to-earnings multiple of 44.25 compared to retail giant Walmart’s (NYSE:WMT) 22.37 times.

Analysts, for one, may be erring on the side of caution. Macroeconomic fundamentals are still on a shaky foundation, with the Fed telegraphing a measured pace of rate hikes over the year. Geopolitical tensions that intensified following the outbreak of the Russia-Ukraine war have severely disrupted the supply chain. This portends an inflationary environment in the near term.

It is under these distressed economic scenarios that defensives such as Costco outperform. Costco is scheduled to release its March month’s sales performance Wednesday after the close. Comps for March will shed some insights into how well the company’s quarter is shaping up.

On the date of publication, Shanthi Rexaline did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Shanthi is a contributor to as well as a staff writer with Benzinga. Equipped with a Bachelor’s degree in Agriculture and an MBA with specialization in finance and marketing, she has about two decades of experience in financial reporting and analysis, and specializes in the biopharma and EV sectors.

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