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Bull of the Day: BJ's Wholesale Club (BJ)

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The effects of Covid-19 and the subsequent business shutdown in the US have already been exhaustively documented. Most traditional retail businesses have seen revenues drop to near zero as Americans shelter in place and reduce shopping trips to essential items.

A small handful of businesses have been the fortunate beneficiaries of the forced shift in shopping habits. The world’s largest online retailer Amazon (AMZN - Free Report) saw a 26% increase in gross revenues in the first quarter, yet saw profits fall short of expectations and warned that Q2 profits would likely be spent entirely on efforts to dramatically expand capacity and protect the health and safety of employees and customers.

Big box wholesale stores have also seen dramatic increases in business because they sell the items that nearly all consumers continue to need even in lockdown. They also sell them in the larger quantities favored by customers who want to stock up with the least possible number of trips to the store.

Some of the sales increases can be attributed to stockpiling of non-perishable commodity items – meaning that the timing of those purchases has simply been shifted forward and is likely to be followed by a slump at some point in the future. A lot of those sales however, are replacing consumable items that would otherwise have been purchased at restaurants, bars or other businesses that have been shuttered. Those sales gains are real, significant and permanent.

Walmart (WMT - Free Report) and Costco (COST - Free Report) will both report results later this month for the quarter that includes the lockdown and both are expected to show revenue increases - but with relatively small earnings growth of 2% and 6%, respectively. In this environment, even modest growth is still pretty attractive and both stocks remain in positive territory in 2020 even as the Dow and S&P 500 remain down double digits.

There’s also smaller warehouse store that’s relatively unknown to those who don’t live on the East Coast, but which enjoys a fiercely loyal following among its customers – BJ’s Wholesale Club (BJ - Free Report) .

With just $3.65B in market capitalization, BJ’s is a tiny fraction of the size of Costco at $35B and Walmart at $353B, but it's enjoying the same increases in sales. In many respects, it is a more attractive investment.

5.5 million members of 218 BJ’s club locations appreciate an atmosphere that’s closer to a traditional neighborhood store than a typical Costco or Sam’s Club, yet offers similar deals on food staples, general merchandise and gasoline.

Just like it’s larger competitors, BJ’s is expected to show mid-single digit sales growth when it reports quarterly results later this month, but the Zacks Consensus Estimate for net earnings predicts an increase of 27%.

Six positive earnings estimate revisions in the past 30 days earn BJ’s a Zacks Rank #1 (Strong Buy).

With a forward P/E ratio of just 15.5X, BJ’s also looks to be a significantly better value than Walmart at 25X and Costco at 35X.

Forward P/E is somewhat of a moving target these days. With many companies suspending guidance and analysts guessing at just how broad and deep the downturn will be over the next year, the range of forward earnings estimates for many companies has been unusually wide. We can accurately observe the numerator “P” (price), but picking the midpoint or average of disparate estimates makes for significant uncertainty in the denominator – the “E”.

So it's worth noting that the range of estimates for BJ’s net earnings in 2020 and 2021 are both less than 10% wide – much less than most stocks and indicating that we’re unlikely to see any big surprises at BJ's.

Just a few months ago, a company like BJ’s would have been viewed as a very boring investment. In the current environment, boring feels awfully comfortable. With steadily growing, predictable revenues and earnings, BJ’s Wholesale is worth a look, especially as an alternative to Walmart or Costco.

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