Costco Stock Rallies Momentum As Investor Sentiment Starts Peaking

Apr. 12, 2022 9:00 AM ETCostco Wholesale Corporation (COST)14 Comments
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Summary

  • Q2 showed more than $1.29 billion in net income.
  • Price per diluted share for Q2 is up from $2.14 to $2.92 year-over-year.
  • Recent earnings statement showed that Costco has increased sales by more than 15.5% for January 2022, lower than the reported 18% of January 2021.
  • In-store sales jumped by 15%, and global foot traffic increased by 6.8%.
  • COST might issue special dividends in the months ahead in 2022.
Costco Announces Raising Minimum Wage to $16 An Hour

Mario Tama/Getty Images News

So far it’s been a challenging year for most retailers, as rising inflation rates have kept consumers at bay, while investors remained hawkish on the stock market, awaiting a response from the Fed over interest rate hikes and the tightening monetary policy.

While the year has brought its own set of challenges, from geopolitical tension, supply chain worries, and labor shortages, Costco Wholesale (NASDAQ:COST) has left investors with the thought-provoking attitude over whether the American wholesaler has become one of the stock markets’ most overvalued stocks.

COST is no stranger to performing in various economic conditions and has been trailing a steady performance thus far, with overall comps increasing 14% in January 2022, higher than the 8% recorded in January 2020 right before the pandemic made its way to the United States.

Relatively speaking, COST has been in a comfortable position for quite some time, and whether key investors feel that the stock is overvalued or not, the coming weeks and months will reflect the company’s resilience in a struggling economic recovery, with inflation at its highest in more than four decades, and American consumer feeling the pinch on their pockets.

Costco Rallies Higher Among Discount Store Contenders

Costco Wholesale, which sells everything from everyday essentials, homeware goods, and other products from its more than 572 US-based stores has been trekking positive performance throughout the last couple of years.

By early 2022, the company reported that it saw sales jump by 15.5% year-over-year, comparatively good considering the same time the year before, January 2021 sales were already standing at an 18% increase.

The somewhat lower sales could be reflected in the high increase of the consumer price index (CPI), which stood at 7.9% at the end of February this year.

But even though in-store sales have been steady with the recent price increases, and the reported membership fee increase, the first since 2017, Costco remains a major league competitor among other wholesale giants such as Amazon, Walmart, and Target.

While these companies had an upper hand on Costco during the first few months of the pandemic, with more focus poised at online sales and eCommerce, Costco remained firm by keeping its traditional brick-and-mortar stores operating throughout the COVID-scare.

To put this into perspective, for the first fiscal quarter of 2022, in-store sales increased by 15%, while the wholesaler saw its global foot traffic jump by 6.8%. With this, we see that consumers, both within the U.S. and internationally are remaining loyal towards the wholesaler.

The 52-week range for COST has been zig-zagging across the board and has averaged between $322.38 and $571.49, with the current price-to-earnings (P/E ratio) at 44.02, and earnings per share (EPS) standing at $12.41. The Zacks Rank has ranked COST at #3, making it a Hold for most investors, and VGM Score of A.

The Zacks Consensus estimate has now increased from $0.34 per share to $12.96 per share showing that the average earnings on COST are standing strong at 13.3%.

Better yet, COST has outpaced the Zacks Retail - Discount Stores as well, showing figures for the last six months of 13.6% and more, compared to the -1.1% predicted.

Higher Dividend Payouts Drives Investor Interest

Costco is still one of the online wholesale retailers that published monthly performance reports and quarterly earnings. First-quarter earnings, per-share earnings have gone from $2.62 per share in 2021, to $2.98 per share.

Back in February 2022, company CFO, director, and executive vice president, Richard Galanti publicly released its Q2 earnings statement.

So far for the fiscal year, 2022 Q2 showed more than $1.29 billion in net income, with $2.92 per diluted share price. This is a staggering increase for the same period the year before, which saw a net income cap at $951 million, and $2.14 per diluted share.

Investors who have been following COST over the last few years revealed that back in 2017 when the company issued a special dividend, it had roughly $5 billion worth in cash flow. By 2020, when another special dividend was issued, cash flow had increased by more than double to roughly $12 billion.

The company started issuing dividends back in 2004, with a first special dividend in 2021 for $7, with additional regular quarterly dividends, Costco managed to issue $8.065 in dividends that year. The same was done in 2015, with a special dividend of $5, 2017 for $7, and in 2020 for $10.

Costco has held an upper hand during periods of crisis and economic uncertainty, to an extent. When consumers and national governments first started realizing the severity of the pandemic back in 2020, Costco could boost its sales, and cash flow, after experiencing high seasonal sales in December 2019, which helped decrease company debt. Cash flow rates for 2022, are already up by 20.4%, higher than the industry average of 16.9%.

So while many have seen COST as an overvalued stock, the company has remained poised to play a key role in the wholesale consumer market. Costco has rallied bullish for most of 2022 so far, with an occasional price drop in their stocks every few trading sessions. The overall sentiment remains that COST is a bit high priced for what it offers investors.

Not Without Risks Involved

Among the positives that COST has delivered in the last few months, there’s still a glimmer of skepticism and risk for some investors looking to add COST in the portfolio.

Some have argued that the valuation of COST is above its expected earnings growth, even when it did manage to report a 24.9% earnings growth ending August 2021. Experts see this as pressure that could be placed on Costco’s perhaps overvalued stocks.

The recent interest rate hikes have scared investors on all fronts, and it could definitely lead to some feeling bullish towards COST. Yet, as the company poised healthy growth and expansion, even during the pandemic, higher interest rates could soon put a damper on their illustrious plans to expand in the coming year.

Perhaps interest rate hikes might not be the overall cause, as higher inflation has managed to put a massive blow on the consumer market as well. For such a mammoth company, market competition and diluted consumer spending could easily become a growing pain for them - but many predict this could only take shape within the next few years.

To end it off, Costco might be lacking some innovation in the field of eCommerce, while improvements have been directed to upscale its online shopping experience, the company is still behind leading giants such as Amazon and Walmart.

Perhaps the coming months will showcase how resilient the company really is. Now that it’s set its sights on offering more online services and an enhanced eCommerce experience partly due to a partnership with Instacart, there might not be any changes to its business model, but it’ll put them in the same ring as other major wholesale retailers.

Final Considerations

The bottom line is, COST can become a lucrative asset on any portfolio, as share prices have seen positive growth, and company dividend payouts have stabilized even during times of adversity. At the end of the day, COST is a buy-and-hold scenario, which is poised for long-term growth, rather than short-term goals.

Final analysis can be tricky to summarize, but the Costco Wholesale brand and COST itself can be considered a safe haven for investor portfolios during bumpy economic recoveries.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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