Shares of retail giant Costco Wholesale (COST +1.20%) haven’t been doing all that well this year. Although the business has continued to generate solid growth, the stock’s value has risen by just 6% thus far, while the S&P 500 has risen at a much more impressive rate of around 12%.
Later this month, on Sept. 24, Costco is scheduled to release its fourth-quarter earnings numbers. This report will be particularly important as it wraps up the fiscal year and could offer crucial guidance for the year ahead. Should investors buy the stock before Costco’s Q4 report comes out?
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Earnings have been a bit of a drag on the stock lately
When Costco last reported earnings in May, the stock proceeded to fall afterward. Earlier in the year, in March, its quarterly results didn’t have much of an impact, either. And in the two prior periods, the stock would fall after reporting earnings.
Costco’s stock hasn’t skyrocketed after recent earnings reports, but investors also shouldn’t expect that to be the case unless there’s a massive surprise. That’s because, for one thing, Costco’s stock has been priced at a premium for a long time now, which means expectations are going to be high; the stock trades at close to 50 times its trailing earnings, which is astronomical when it comes to retail.
Barring something completely unforeseen, I don’t think Costco’s stock will surge after it reports Q4 earnings. There’s more reason to expect it to fall than to rise, due to not only its high valuation but also the concerning outlook for the economy and the possibility of interest rate hikes.
Today’s Change
(1.20%) $10.88
Current Price
$915.65
Key Data Points
Market Cap
Day’s Range
$910.79 – $921.99
52wk Range
$844.06 – $1096.50
Volume
831.1K
Avg Vol
2.2M
Gross Margin
12.88%
Dividend Yield
0.61%
Costco has a phenomenal business, but I wouldn’t invest in it today
A business can be doing exceptionally well, and its stock can still be a bad buy. Those things aren’t mutually exclusive. Costco’s stock falls into that category.
Its August sales numbers showed that its warehouses continue to do well, with comparable sales up over 8% for the entire business, including 9% growth in the U.S. However, this is not a stock that’s worth paying 50 times earnings for. At that kind of multiple, there should be a zero after its recent growth rate. It would need to be a highly powered growth stock to justify that kind of multiple.
As strong a business as it may be, there are better-valued stocks out there for investors to consider than Costco. Even if it has a solid performance in Q4, I don’t expect the stock to rise much higher, simply because its valuation is already incredibly high.