Back to top

Image: Bigstock

Buy Costco (COST) Stock Ahead of Q1 Earnings?

Read MoreHide Full Article

Costco (COST - Free Report) is set to report its first quarter of fiscal 2020 after the market closes on Thursday, December 12. The wholesale retailer has seen its shares rise over 45% in 2019 and its stock currently hovers around 4% below its 52-week highs.

COST stock has enjoyed a nice breakout since 2009 and has easily outpaced the S&P 500’s 189% gain. The company has also put together a solid year for its shareholders, as fellow large-cap retailers Target (TGT - Free Report) and Walmart (WMT - Free Report) also shined.

Costco’s Bull Run

Costco has enjoyed its bull run since 2009 because of a few characteristics that distinguish it from other retailers. The company offers its items at inexpensive rates that attract consumers. Costco is able to do this because it generates most of its profits from its membership fees, which in turn allows the company to sell its goods at such competitive price points.

The discounted goods Costco offers also makes it a solid defensive retail stock to own as consumers tend to gravitate to discount chains when macroeconomic conditions tighten household budgets. Its value-driven approach has helped its largely brick-and-mortar landscape thrive at a time when e-commerce has displaced many other traditional retailers.

In addition to these competitive advantages, Costco recently opened a pilot location in China that has seen tremendous success. The positive reaction its new Chinese store received bodes well for Costco moving forward as China represents a key market that can offer lucrative growth opportunities.

Should Investors Bite?

Costco’s run of success has driven up its valuation to a level that some may think is too high for a discount retailer. Costco shares currently trade for around 33.8X its forward earnings, which easily outpaces its industry average of 27.1X forward earnings. Costco’s forward multiple also towers over Dollar General (DG - Free Report) and Dollar Tree (DLTR - Free Report) , which trade at forward multiples of 23.3X and 19.7X, respectively.

Costco pays out a quarterly dividend with a 0.88% yield, which might not impress income investors and is exceeded by Target’s 2.09% yield and Walmart’s 1.78% payout. Costco’s premium prices paired, with its less than stellar dividend yield might discourage some to strike while the iron is hot.

Despite its inflated valuation, Costco still runs a tight ship, which could be a reason why Wall Street has poured into the stock this year. Costco has about a 3.1% operating margin that has remained stable and it delivers a 17.1% return on invested capital, which is 330 basis points above the industry average.

Costco also has a debt to equity ratio of 0.33, which is significantly lower than the industry average of 1.33. The retailer’s low debt to equity ratio limits the risk of owning shares of this company.

Outlook

Our Q1 Zacks consensus estimates call for Costco to see a top-line increase of 6.5% to $37.33 billion and a bottom-line rally of 5.6% to $1.70 per share.

Looking ahead to fiscal 2020, our estimates currently project earnings to grow 4.5% to $8.56 per share and for net revenue to climb 6.7% to $162.89 billion. These estimates represent a slight slowdown in sales growth as Costco’s fiscal 2019 sales grew 7.9%.

Costco’s top and bottom-line gains are forecasted to continue, which might be enough to send the stock to a new 52-week high. However, investors should look out for where comparable stores are in the first quarter as well.

Bottom Line

Costco may have struck gold in China as consumer traffic shut down streets during the store’s grand opening back in August. Tapping the Chinese market might be key to extending the retailer’s growth runway. Additionally, consumer spending continues to anchor the domestic economy, which should help Costco moving forward.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>