Once again, Costco (NASDAQ: COST) gave its shareholders reason to be optimistic. The massive warehouse store operator just reported revenue of $58.5 billion (up 9% year over year) and diluted earnings per share of $3.78 (up 29%) that easily beat Wall Street consensus analyst estimates. The business continue to hum along.
But even though this is a top retail stock that has crushed it for investors historically, I think it’s best to keep it on your watch list for now. Here’s why you should avoid adding Costco to your portfolio at the moment.
A high-quality business
If anyone takes even a quick look at Costco, I’m sure they’d come away extremely impressed. The fact that the company beat analysts’ estimates is just another example of its strong fundamental performance, something that investors have grown accustomed to regardless of the macro picture.
In the past decade, Costco has reported annualized revenue growth of 8.5%. In fact, in the past 10 full fiscal years, there hasn’t been a single annual sales decline. This stellar track record demonstrates the company’s consistent operational success.
In the latest fiscal quarter (Q3 2024, ended May 12), same-store sales increased 6.6%. This proves that during a period of ongoing inflationary pressures that continue to pinch consumer budgets, Costco’s value proposition shines. That same-store sales jump was mainly attributed to a boost in customer traffic.
Costco benefits from having strong customer loyalty. This is due to its membership-based business model. There are currently 74.5 million member households, up 7.8% from the same period last year. While these consumers are required to pay annual fees for the right to shop at Costco warehouses, the savings they can take advantage of make it worthwhile.
With trailing-12-month net sales of almost $250 billion, Costco is the world’s third-largest retailer. It buys merchandise in bulk from its vendors, which allows the company to obtain favorable pricing. These savings are then passed on to shoppers. This advantageous setup makes it extremely difficult for rivals to compete effectively, protecting Costco’s industry position.
No room for error
As I outlined above, Costco is a high-quality company, bolstered by its durability and competitive advantages. This is partly exemplified by the fact that diluted earnings per share have risen at a compound annual rate of 13.5% over the past 10 years. But this track record, coupled with sizable special dividends, still doesn’t justify paying such a high premium to own the business.
Its long-running financial success has made Costco a top stock for investors. In just the last five years, shares have soared 241%. The Nasdaq Composite, for comparison’s sake, is up 125% in the same period.
Thanks to this impressive performance, the stock has almost never been more expensive this century. It trades at a price-to-earnings (P/E) ratio of 50.5. Since June 2019, this P/E multiple has surged 72% higher. Clearly, the market has become very bullish about the business — more so now than at almost any point in its history.
In my opinion, this doesn’t create a compelling opportunity for investors who are considering adding Costco shares to their shopping cart. Expectations are sky-high right now, leaving no margin of safety.
It’s likely that Costco’s top- and bottom-line growth will slow over the next decade, particularly as it further penetrates its key markets and runs out of expansionary runway to open new warehouses. However, the stock is priced as if growth is going to accelerate dramatically.
Investors should keep Costco on their watch list for now and wait until the valuation drops significantly. But it might be a while before this happens — if ever.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
Costco Beats Wall Street Estimates: Here’s Why You Shouldn’t Buy the Stock was originally published by The Motley Fool
From: Yahoo.com
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