With Strong Momentum, Is Costco a Defensive Buy?

July 15, 2024 at 05:15 AM EDT

Costco Wholesale (COST) recently reported solid June sales results and announced plans for an annual membership fee hike for the first time in seven years. Given its essential products, robust financial health, and sustained momentum, can Costco be considered a defensive buy? Read more…

With a $373.69 billion market cap, Costco Wholesale Corporation (COST) is a leading membership-based warehouse club that offers a wide range of essential goods, including groceries and several household items. During economic downturns, consumers may shift their purchasing behavior toward discount retailers, making Costco’s business model inherently defensive.

The retailer currently operates 882 warehouses, including 609 in the U.S. and Puerto Rico, 108 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom, 18 in Korea, 15 in Australia, and more. Also, Costco operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan and Australia.

COST has consistently shown solid revenue growth and attractive profit margins. For the retail month that ended July 7, 2024, the company’s net sales were $24.48 billion, up 7.4% year-over-year. Moreover, e-commerce demand remains a significant driver for Costco, with comparable sales up 18.4% for the period.

Costco recently announced an increase in annual membership fees for the first time in seven years. The company said its annual membership fees, effective September 1, 2024, will rise by $5 to $65 for U.S. and Canada Gold Star (individual), Business, and Business add-on members.

In addition, annual fees for Executive Memberships in the U.S. and Canada will increase from $120 to $130, and the maximum annual 2% Reward associated with the Executive Membership will rise from $1,000 to $1,250. After Costco announced an increase in membership fees, several analysts raised their price targets for the stock, expecting it could result in higher profits.

According to Bank of America, COST’s membership hike will give investors higher earnings visibility into 2026. It raised the price target on Costco from $874 to $962 per share.

“We reiterate our Buy and expect COST to gain share in the current environment as consumers continue to adjust to higher prices, making COST's impressive value proposition and price positioning even more attractive,” the bank said.

Shares of COST have gained 23.4% over the past six months and 60.2% over the past year to close the last trading session at $842.90.

Let’s look at factors that could influence COST’s performance in the upcoming months.

Solid Financials

For the third quarter that ended May 12, 2024, COST’s total revenue increased 9.1% year-over-year to $58.52 billion. That beat the analysts’ revenue estimate of $58.47 billion. The company’s income before income taxes rose 29% from the year-ago value to $2.28 billion.

COST’s net income grew 29.1% year-over-year to $1.68 billion. The company’s EPS came in at $3.78, exceeding the analysts’ expectations of $3.76 and up 29% year-over-year. As of May 12, 2024, Costco’s cash and cash equivalents stood at $10.40 billion.

Impressive Historical Growth

Over the past five years, COST’s revenue has grown at a CAGR of 11.1%. The company’s levered free cash flow has increased at a CAGR of 20% over the same period, and its EBITDA has improved at a 12.8% CAGR. Its total assets have grown at a CAGR of 9.2% over the same timeframe.

Furthermore, the company’s net income and EPS have increased at CAGRs of 14.8% and 14.7%, respectively, over the past five years.

Optimistic Analyst Estimations

Analysts expect COST’s revenue and EPS for the fourth quarter (ending August 2024) to grow 1.7% and 4.3% year-over-year to $80.25 billion and $5.07, respectively. Costco also surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year ending August 2024, Street expects COST’s revenue and EPS to grow 5.3% and 13.6% from the prior year to $255.05 billion and $16.08, respectively. In addition, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 7.4% and 10.5% year-over-year to $273.86 billion and $17.78, respectively.

Reliable Dividends

On July 10, COST’s Board of Directors declared a quarterly cash dividend on common stock of $1.16 per share, payable on August 9. Earlier this year, the company approved a quarterly dividend increase from $1.02 to $1.16 per share, or $4.64 on an annualized basis.

Moreover, the company’s dividend payouts have increased at a CAGR of 13.5% over the past three years. Costco has raised its dividends for 19 consecutive years.

POWR Ratings Reflect Promise

COST’s good fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. COST has a B grade in momentum. The stock is currently trading above its 50-day and 200-day moving averages of $822.99 and $700.46, respectively, indicating an uptrend. It also has a B grade for Stability, justified by its 60-month beta of 0.77.

Additionally, COST has a B grade for Sentiment, in line with the favorable analyst estimates.

Within the A-rated Grocery/Big Box Retailers industry, COST is ranked #22 out of 36 stocks.

Beyond what I have stated above, we have also given COST grades for Growth, Quality, and Value. Get all COST ratings here.

Bottom Line

COST is considered stable and less susceptible to economic downturns, as its products enjoy an elastic demand. The discount retailer consistently delivered robust revenue growth, healthy profit margins, and a solid balance sheet, as evidenced by its third-quarter 2024 results.

Moreover, the recently announced annual membership fee hikes, expected to take effect in the U.S. and Canada in September, could raise Costco’s earnings and value proposition. Given its defensive business model, solid momentum, robust financial health, and bright long-term outlook, it would be wise to invest in COST now.

How Does Costco Wholesale Corporation (COST) Stack Up Against Its Peers?

While COST has an overall POWR Rating of B, investors could also check out these other stocks within the Grocery/Big Box Retailers industry with A (Strong Buy) or B (Buy) ratings: Marks & Spencer Group Plc (MAKSY), PriceSmart Inc. (PSMT), and Caseys General Stores, Inc. (CASY).

To explore more A and B-rated retail stocks, click here.

What To Do Next?

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COST shares rose $3.60 (+0.43%) in premarket trading Monday. Year-to-date, COST has gained 28.64%, versus a 18.93% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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