Costco's Strong Growth Continues. But Is the Stock Too Expensive?

As usual, there's truly thing to kick astir successful Costco Wholesale's (NASDAQ: COST) latest quarterly results. The concern keeps doing what shareholders person travel to expect: generating dependable comparable-sales growth, increasing rank income, gaining integer momentum, and expanding its store count. The study erstwhile again shows that it remains a best-in-class retailer -- and possibly adjacent 1 of the champion businesses successful the world.

But liking the concern is not the aforesaid arsenic liking the stock. While the erstwhile remains easy, the second requires a leap of faith. The problem, of course, is price. Costco tin support executing good and inactive beryllium a disappointing concern from this terms if the lofty valuation gets rerated lower. And with shares adjacent $1,000 again, investors should instrumentality this hazard seriously.

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As of this writing, Costco banal trades astatine astir 51 times earnings. That is simply a precise affluent valuation for a retailer -- adjacent 1 arsenic awesome arsenic Costco. In fact, it's a pricey valuation for immoderate stock.

To warrant that benignant of multiple, Costco apt needs to support doing astir everything right: support steadfast comparable-sales growth, support rank income rising nicely, proceed gaining traction digitally, and debar immoderate meaningful slowdown successful store postulation oregon mean lawsuit transaction size.

In different words, the barroom is high.

And that is precisely the problem. When a banal trades astatine this benignant of premium, investors are not conscionable paying for a large business. They are paying for years of continued excellence with small friction. There is precise small country for risks, and determination are plenty. To sanction a handful, risks see a softer user environment, proviso concatenation disruption, caller contention (imagine if Amazon ever decides to unfastened a wholesale retail store), oregon adjacent conscionable a agelong of simply bully -- alternatively of exceptional -- execution.

This is not to accidental Costco is wildly overvalued. But is it trading debased capable to marque it a buy? Probably not.

With this said, Costco's latest results lone helped the bull case, offering a reminder of wherefore the marketplace is consenting to wage specified a premium successful the archetypal place. Costco's results were beardown crossed the board.

The company's fiscal second-quarter nett income roseate 9.1% twelvemonth implicit twelvemonth to $68.2 billion. Comparable sales, oregon income astatine stores unfastened for much than a year, roseate 7.4% twelvemonth implicit year, oregon 6.7% erstwhile adjusted to exclude the impacts of changes successful gasoline prices and overseas exchange.