By Sabrina Escobar
Costco Wholesale stock was on track for its second straight day of losses Monday following backlash from a lackluster fiscal second-quarter earnings report.
Take advantage of the dip, some analysts said, but be wary of the stock’s valuation.
Shares of Costco were falling 1.6% to $713.83 on Monday after closing around 7% lower Friday in the stock’s worst trading day in nearly two years. The past two trading days essentially have erased the stock’s nearly 9% gain over the past month.
At the heart of the pullback was Costco’s slight revenue miss for the holiday quarter, which ended in mid-February. As Barrons’ Andrew Bary noted this weekend, a quarterly sales increase of 6% was hardly enough to justify the stock’s lofty valuation.
Before Thursday’s earnings report, Costco traded at a record 48 times forward earnings. On Monday, Costco’s price-to-earnings ratio had ticked down to 43.6 — but that’s still nearly 10 points above Costco’s historical average of 35.5, according to FactSet.
Indeed, Costco’s steep valuation is one of the main factors keeping some investors bearish despite the company’s solid execution in recent quarters. D.A. Davidson and CFRA, for instance, both reiterated Hold ratings on the stock after earnings, saying they were holding back primarily because of valuation.
Bulls say the stock’s premium is warranted — and the recent downturn is a chance to nab a pricey stock at a slight discount.
“We view this as a healthy correction following major outperformance,” wrote Rupesh Parikh, analyst at Oppenheimer. “For longer-term players, we would continue to take advantage of any dips.”
TD Cowen’s Oliver Chen agreed. On Monday, he reiterated an Outperform rating on Costco and bumped up his price target to $777 from $700.
“Costco is well-positioned to continue delivering robust earnings growth over the near to medium term,” he wrote, adding that the company could continue to win market share in the coming quarters. Growth drivers include new store openings, strong membership renewal trends, advances in e-commerce, and expansion in international markets, particularly China, where the company just opened its sixth store.
Another catalyst will be the much-awaited increase to its membership fee. Historically, Costco has raised fees every five years but has delayed doing so in the face of higher inflation. The most recent increase was in June 2017.
That said, with membership renewal rates reaching 93% in the latest quarter and the number of total member households up about 8% year over year, the company should be still be able to see “outsize” membership fee income growth in the next few quarters, noted BofA Securities analyst Robert Ohmes. He also raised his price target on the shares to $865 from $770.
Write to Sabrina Escobar at sabrina.escobar@barrons.com