Dj Costco Wholesale Corp. Stock Underperforms Tuesday When Compared To Competitors

Growth investors focus on stocks that are seeing above-average financial growth, as this feature helps these securities garner the market's attention and deliver solid returns. But finding a growth stock that can live up to its true potential can be a tough task.

By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company's growth story is over or nearing its end, betting on it could lead to significant loss.

However, the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects, makes it pretty easy to find cutting-edge growth stocks.

Costco (COST) is one such stock that our proprietary system currently recommends. The company not only has a favorable Growth Score, but also carries a top Zacks Rank.

Studies have shown that stocks with the best growth features consistently outperform the market. And returns are even better for stocks that possess the combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy).

While there are numerous reasons why the stock of this warehouse club operator is a great growth pick right now, we have highlighted three of the most important factors below:

Earnings Growth

Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for Costco is 16.7%, investors should actually focus on the projected growth. The company's EPS is expected to grow 10.2% this year, crushing the industry average, which calls for EPS growth of 10%.

Impressive Asset Utilization Ratio

Asset utilization ratio -- also known as sales-to-total-assets (S/TA) ratio -- is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.

Right now, Costco has an S/TA ratio of 3.66, which means that the company gets $3.66 in sales for each dollar in assets. Comparing this to the industry average of 1.46, it can be said that the company is more efficient.

While the level of efficiency in generating sales matters a lot, so does the sales growth of a company. And Costco is well positioned from a sales growth perspective too. The company's sales are expected to grow 7.4% this year versus the industry average of 4.3%.

Promising Earnings Estimate Revisions

Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

The current-year earnings estimates for Costco have been revising upward. The Zacks Consensus Estimate for the current year has surged 0.1% over the past month.

Bottom Line

Costco has not only earned a Growth Score of B based on a number of factors, including the ones discussed above, but it also carries a Zacks Rank #2 because of the positive earnings estimate revisions.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination positions Costco well for outperformance, so growth investors may want to bet on it.

Zacks Investment Research

Costco (COST) closed the latest trading day at $932.88, indicating a -1.16% change from the previous session's end. The stock trailed the S&P 500, which registered a daily gain of 0.1%. On the other hand, the Dow registered a gain of 0.69%, and the technology-centric Nasdaq increased by 0.06%.

The warehouse club operator's stock has climbed by 6.16% in the past month, exceeding the Retail-Wholesale sector's gain of 5.33% and the S&P 500's gain of 4.37%.

Investors will be eagerly watching for the performance of Costco in its upcoming earnings disclosure. The company is predicted to post an EPS of $3.79, indicating an 8.91% growth compared to the equivalent quarter last year. At the same time, our most recent consensus estimate is projecting a revenue of $62.37 billion, reflecting a 7.9% rise from the equivalent quarter last year.

For the full year, the Zacks Consensus Estimates are projecting earnings of $17.75 per share and revenue of $273.33 billion, which would represent changes of +10.18% and +7.42%, respectively, from the prior year.

Investors might also notice recent changes to analyst estimates for Costco. These revisions typically reflect the latest short-term business trends, which can change frequently. As a result, we can interpret positive estimate revisions as a good sign for the company's business outlook.

Based on our research, we believe these estimate revisions are directly related to near-team stock moves. To benefit from this, we have developed the Zacks Rank, a proprietary model which takes these estimate changes into account and provides an actionable rating system.

The Zacks Rank system, which varies between #1 (Strong Buy) and #5 (Strong Sell), carries an impressive track record of exceeding expectations, confirmed by external audits, with stocks at #1 delivering an average annual return of +25% since 1988. The Zacks Consensus EPS estimate has moved 0.1% higher within the past month. Currently, Costco is carrying a Zacks Rank of #2 (Buy).

Looking at its valuation, Costco is holding a Forward P/E ratio of 53.16. For comparison, its industry has an average Forward P/E of 20.11, which means Costco is trading at a premium to the group.

We can additionally observe that COST currently boasts a PEG ratio of 5.82. The PEG ratio is akin to the commonly utilized P/E ratio, but this measure also incorporates the company's anticipated earnings growth rate. The Retail - Discount Stores industry had an average PEG ratio of 2.33 as trading concluded yesterday.

The Retail - Discount Stores industry is part of the Retail-Wholesale sector. This industry, currently bearing a Zacks Industry Rank of 33, finds itself in the top 14% echelons of all 250+ industries.

The Zacks Industry Rank assesses the vigor of our specific industry groups by computing the average Zacks Rank of the individual stocks incorporated in the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.

Be sure to use Zacks.com to monitor all these stock-influencing metrics, and more, throughout the forthcoming trading sessions.

Zacks Investment Research

Costco Wholesale Corporation COST has reaffirmed its strong presence in the retail sector with decent sales results for October 2024. In a market where value remains a top priority for consumers, Costco’s distinctive membership structure, attractive pricing strategy and unwavering customer loyalty have allowed the company to sustain its leadership despite facing a tough operating climate.

Let’s delve into the details of Costco's recent performance.

Costco's October Sales Signal Strength

COST’s comparable sales for October illustrate its market strength across various regions. For the four weeks ended Nov. 3, comparable sales in the United States grew 4.1%, while Canada and Other International markets saw increases of 8% and 7.1%, respectively. The total company comparable sales rose 5.1%. This stellar performance follows consecutive increases of 6.7% and 5% in September and August, respectively.

When adjusting for the effects of gasoline prices and foreign exchange rates, Costco’s comparable sales paint an even more impressive picture. In the United States, comparable sales, excluding these factors, rose 5.8% in September, while Canada and Other International markets posted gains of 8.7% and 8.4%, respectively. The company’s total comparable sales, excluding these external factors, increased 6.5%.

One of the standout aspects of Costco’s October performance was its 19.3% increase in e-commerce comparable sales. Excluding the impacts of gasoline prices and foreign exchange, the metric was up by an equivalent rate. The surge in online sales underscores the company's effective digital strategy and ability to cater to the evolving shopping preferences of consumers.

As a result, Costco's net sales for October increased 7.2%, reaching $20.03 billion, up from $18.68 billion in the same period last year. This follows a sales improvement of 9% and 7.1% reported in September and August, reflecting a strong and consistent sales performance in the past few months.

The October results were slightly impacted by a shift in sales driven by unusual consumer behavior related to the hurricanes and port strikes in September. This pull-forward effect reduced October's total and comparable sales by just over one percent in the United States and just under one percent globally.

Have you been paying attention to shares of Costco (COST)? Shares have been on the move with the stock up 6.2% over the past month. The stock hit a new 52-week high of $962 in the previous session. Costco has gained 43% since the start of the year compared to the 26.6% move for the Zacks Retail-Wholesale sector and the 23% return for the Zacks Retail - Discount Stores industry.

What's Driving the Outperformance?

The stock has an impressive record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on September 26, 2024, Costco reported EPS of $5.15 versus consensus estimate of $5.05 while it missed the consensus revenue estimate by 0.07%.

For the current fiscal year, Costco is expected to post earnings of $17.75 per share on $273.33 billion in revenues. This represents a 10.18% change in EPS on a 7.42% change in revenues. For the next fiscal year, the company is expected to earn $19.36 per share on $291.13 billion in revenues. This represents a year-over-year change of 9.03% and 6.51%, respectively.

Valuation Metrics

Costco may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.

On this front, we can look at the Zacks Style Scores, as they provide investors with an additional way to sort through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. The idea behind the style scores is to help investors pick the most appropriate Zacks Rank stocks based on their individual investment style.

Costco has a Value Score of C. The stock's Growth and Momentum Scores are B and D, respectively, giving the company a VGM Score of B.

In terms of its value breakdown, the stock currently trades at 53.2X current fiscal year EPS estimates, which is a premium to the peer industry average of 20.1X. On a trailing cash flow basis, the stock currently trades at 44.5X versus its peer group's average of 16.8X. Additionally, the stock has a PEG ratio of 5.82. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.

Zacks Rank

We also need to consider the stock's Zacks Rank, as this supersedes any trend on the style score front. Fortunately, Costco currently has a Zacks Rank of #2 (Buy) thanks to rising earnings estimates.

Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Costco passes the test. Thus, it seems as though Costco shares could have a bit more room to run in the near term.

How Does COST Stack Up to the Competition?

Shares of COST have been soaring, and the company still appears to be a decent choice, but what about the rest of the industry? One industry peer that looks good is Burlington Stores, Inc. (BURL). BURL has a Zacks Rank of # 2 (Buy) and a Value Score of B, a Growth Score of A, and a Momentum Score of F.

Earnings were strong last quarter. Burlington Stores, Inc. beat our consensus estimate by 26.32%, and for the current fiscal year, BURL is expected to post earnings of $7.91 per share on revenue of $10.71 billion.

Shares of Burlington Stores, Inc. have gained 4.3% over the past month, and currently trade at a forward P/E of 33.28X and a P/CF of 23.92X.

The Retail - Discount Stores industry is in the top 14% of all the industries we have in our universe, so it looks like there are some nice tailwinds for COST and BURL, even beyond their own solid fundamental situation.

Zacks Investment Research