Costco update August 14, 2018

The report for Costco is updated and rate Weak Sell / Hold at $220.31 (That was the analysis price, it’s 221.33 as I post this).

Costco is a fantastic business. It’s high P/E (34 currently) is the reason that I have typically rated the stock as Weak Sell /Hold going back quite a few years. Occasionally there have been pullbacks but it has consistently recovered to trade at a high P/E level.

Once again it looks expensive. But there may be little reason for it to pull back unless there is a general market decline. It seems set to report strong earnings growth in the next two quarters due to the lower income tax rates. But it does face somewhat tougher comparable in those quarters which saw growth in the prior year of 18% and 13%. The consensus analyst forward P/E ratio implies an earnings per share growth expectation of 17%.

For Costco, there has been no sign that if faces any competitive price pressures. I had thought that in the reputably highly competitive grocery market competition would force some of the income tax savings to be passed onto customers. For Costco so far, this has not been the case. Due to its low costs, Costco may be more protected from competition.

Overall, Costco’s share price could pullback if earnings growth is not nicely into the expected double digits.  If I held it I would likely sell at least half based on the high valuation. But a reasonable strategy might be to hold and be prepared to add to the position on a pullback. Over the long term such as five to ten years the stock will likely continue to rise even if it does pullback temporarily.

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