Investors are anxiously awaiting good news from companies that are reporting earnings over the next few weeks. Earnings season begins with banks reporting, and so far, they've been delivering good news. JPMorgan Chase reported record profits last week, and Goldman Sachs and Morgan Stanley both topped revenue estimates this week.
It's a promising start to the season, but will the good news carry over to other industries over the next few weeks? Warehouse club retailer Costco Wholesale (COST 0.34%) has given investors several updates over the past few weeks, and they've also been mainly positive. The stock is up 40% over the past year. Is it too expensive at the current price?
Let's take a look.
Why Costco stock is climbing
Costco stock is a consistent market beater. It operates a differentiated retail membership model that generates loyalty, volume, and profits.
Although it's a star under any circumstances, it also does well under pressure. It offers the lowest prices that shoppers can usually find, so when times are tough, they spend more at Costco.
But even Costco's sales were beginning to dip, with customers staying away from large and expensive products. Lower-priced everyday items typically carry slimmer profit margins, so that's not a helpful trend. At the same time, prior-year sales growth was very high, making for difficult year-over-year comparisons. When it rains, it pours.
The happy news is that Costco's sales are accelerating again. In the 2024 fiscal first quarter (ended Nov. 26), revenues increased by 6% year over year, and comparable-store sales (comps) were up 3.8%. These are tremendous results on some of the most important metrics in any retailer's business. As a result, earnings per share rose from $3.07 to $3.58.
Management made the long-anticipated announcement that it was issuing a special dividend. Costco is in the habit of sharing cash profits with shareholders in this way from time to time, but this one was the highest-ever payout at $15 per share. Costco's regular quarterly dividend yields 0.6% at the current price. It's never very high, but it's especially low right now because the stock has soared over the past few weeks due to the special dividend.
To top that off, Costco reported December results last week, and they were excellent. Sales increased 10% over last year, and comps were up 8.5%.
There are many reasons to love Costco stock and be confident about its future. But should you buy the stock now?
Is Costco stock expensive?
What might be holding some investors back is the stock's valuation. Many investors rely on the standard price-to-earnings (P/E) ratio to get a picture of valuation, and according to this ratio, Costco stock does look very expensive. It's trading well above its 10-year average and close to its highest ever.
COST PE ratio data by YCharts.
However, this might not tell the whole story. The price-to-free-cash-flow (P/FCF) ratio is below average right now. Costco has been taking in tons of cash, which is part of why it's handing out a good chunk of it as a special dividend.
COST price to free cash flow, data by YCharts.
Each of these ratios tells investors something different, and it's important to look at all of them to get a sense of what a stock is worth. Some investors prefer to use P/FCF because earnings can be manipulated while cash in and out is a more objective measure. More financial clarity is never a bad idea.
Costco stock is a forever stock, and it's not too expensive to buy this market-beating household name right now. If you have a long-term horizon, it's a great candidate for a stock that could lead to high gains for decades.
