- Costco reported 7.3 percent growth in revenue and 26.8 percent growth in net income from the same period last year.
- While revenue fell just short of analyst expectations, profits were much higher and the stock is up in after-hours trading.
- Investing in Costco hinges on whether or not you believe its membership model will translate to competitive advantages in the long term.
Bulk seller Costco released earnings after market close on Thursday, March 7, revealing stronger-than-expected results that had the stock climbing in after-hours trading. For the 12 weeks ending on Feb. 17, net sales increased over 7 percent and net income grew by nearly $200 million compared to the same period a year earlier.
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Earnings Miss on Revenue but Offer a Big Beat on Profits
Shares of Costco were up over 4 percent in after-hours trading immediately after the results were released, showing a strong response from the market after shares declined 1.11 percent in the trading day beforehand.
The outcomes driving those strong market results would appear to lie in the growth in both revenue and net income year-over-year that were revealed in the earnings release. The $188 million more in income represented a 26.8 percent jump over 2018, while the 7.3 percent jump in revenue included an additional $52 million in membership fees over last year’s results.
Those results compare favorably to analyst estimates gathered by Nasdaq. Analysts expected the stock to show earnings of $1.70 a share on revenue of $35.67 billion. And while the company missed slightly on revenue with $34.63 billion, the $2.02 per share in earnings was a big beat that is likely driving the uptick in price in after-hours trading.
Is Costco Stock a Buy Based on Results?
The investment thesis for Costco is relatively clear looking at the numbers independently. A 26.62 percent return on equity is strong, and while the 29.42 P/E ratio is higher than a staunch value investor might want, the 0.66 P/S ratio would seem to imply that the price relative to total sales is still fairly strong. And there’s a dividend yielding a little over 1 percent a year to boot.
And, when you put that in consideration of similar companies, it would appear to hold up to some degree. Walmart’s 43.12 P/E ratio is slightly higher even if its 0.55 P/S ratio is slightly better. But Walmart’s return on equity of just 8.95 percent and profit margin of 1.3 percent (Costco’s is 2.25 percent) could indicate that there’s some reason to see Costco as the better buy. However, Target’s 12.64 P/E ratio, 0.53 P/S ratio and 4.35 percent profit margin — all combining to produce a return on equity of 29.17 percent — might indicate that if you’re searching for an all-in-one big-box store to invest in, there are better options.
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That said, those metrics are likely overshadowed by the larger consideration of how Costco’s strategy of offering bulk discounts to customers with paid memberships fits into the post-Amazon retail paradigm. Does Costco’s ability to offer discounts on many common items ultimately trump the competition? Or will its membership model get eclipsed by Amazon Prime in the long run? There’s no way of knowing for sure, but any potential investment should keep these factors in mind.
And in case you were wondering, there’s no discount for buying an economy-sized block of Costco shares. Alas.
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