When it comes to the stock market, a year isn't all that long. The volatility associated with cyclical economic swings means that investing is a medium whose returns are best measured across multiple years or even decades.
However, that doesn't mean investors should ignore a company's short-term prospects. Excellent 10-year operating runs are built from a series of individual good years, after all.
What does 2024 hold for Costco Wholesale (COST +0.23%) stock, then, given the warehouse giant's recent positive operating momentum and soaring returns? Let's dive right in.
The outlook calls for greater growth
There are encouraging signs that the year ahead will bring more good news regarding growth. In early February, Costco announced that comparable-store sales were up a solid 5% through late January. That's about even with the pace investors have seen from Walmart (WMT +0.62%), the warehouse club chain's biggest competitor.
NASDAQ: COST
Key Data Points
Notably, Costco is experiencing a big rebound in its e-commerce segment, which tends to sell more consumer discretionary products like furniture and jewelry. Strength here suggests that shoppers might be ready to spend more aggressively in 2024 after reigning in their budgets last year. If that happens, then Costco has a good shot at posting stronger customer traffic, along with a rebound in average spending per visit. These factors would support positive returns for shareholders.
Don't expect high profits
Costco investors should keep their expectations in check when it comes to the chain's profit potential. Sure, 2024 will likely bring the company's first membership fee increase in over five years. Most of the chain's profits come from those subscriptions.
But management directs almost all that extra cash toward bolstering the chain's price leadership rather than allowing profit margins to rise. That explains why Costco still books the same 3% operating margin that shareholders have seen since the pre-pandemic days.
WMT Operating Margin (TTM) data by YCharts
Peers like Walmart and Target (TGT +1.14%), meanwhile, have allowed margins to expand (and contract) along with the pace of sales growth. Costco's stock would likely rally if its operating profit margin rises in 2024. But investors can't count on this boost happening in the coming quarters.
Cash returns and price
Costco's stock is priced at an elevated premium that might limit shareholders' returns from here. Its price-to-sales ratio of over 1.3 is nearly double Walmart's valuation, in fact. It's also the highest premium that investors have paid for this stock in the past decade. There's a clear risk of paying too high of a price for this stock, in other words.
Your cash returns won't make up the difference, either. Costco just paid a huge special dividend that reduced its cash balance by over $7 billion. As a result, investors can't expect another big payout beyond the chain's current commitment of a 0.6% yield. You can earn a 1.3% yield from owning Walmart, for context, and a nearly 3% yield from Target stock.
There's every reason to expect Costco's business to achieve record sales and earnings in 2024, just as the business has through most of the past decade. Yet investors shouldn't expect those operating wins to translate directly into further market-beating returns for the stock given Costco's pricey valuation today.
