Costco Wholesale Corporation (COST), a worldwide operator of membership warehouses and e-commerce websites, has gained 18.6% over the past year. This is attributable mainly to its value proposition: it  offers high-quality goods at reasonable prices. Its management has executed this model flawlessly over the past years. However, the stock’s overall performance  has been unimpressive versus the S&P 500 Index.

COST  has lost 10.3% year-to-date. A  recent earnings miss, due primarily to higher gas prices, has exacerbated downside pressure on the stock. Its $2.14 EPS for the quarter ended February 2021 has missed the Street’s estimates by 12.7%. Furthermore, the recent resurgence of coronavirus cases is expected to adversely impact the company’s global supply chain.

But because COST still has robust revenue growth, uncertainty about the stock’s future movement now reigns.

Click here to checkout our Retail Industry Report for 2021

Here are the factors that we think could influence COST’s performance in the near term:

Robust Quarterly Performance

Comparable sales growth has been the primary driver of COST’s profitability in its  last reported quarter. Its net sales include core merchandise categories, warehouse ancillary, and other businesses. For the its fiscal second quarter, ended February 14, 2020, COST’s net sales have increased 14.6% year-over-year to $44.77 billion, driven by an 13% increase in comparable sales, and sales at 18 net new warehouses opened since the end of the second quarter of 2020 and  rising sign ups at warehouses. Its operating income has risen 5.8% from its year-ago value to $1.34 billion, while its EPS has improved 1.9% to $2.14.

Pandemic Headwinds

The continuing impact of the COVID-19 pandemic is  highly unpredictable. Against the advice of health experts, several states have lifted coronavirus mask mandates and, at least in-part as a result, more infectious variants of the virus have spread across the country . The United States  recently crossed 30 million coronavirus cases. The resurgence of COVID-19 in several countries is expected to further impact the company’s global supply chain, with restrictions and limitations on business activities. Also,  COST’s liquidity is highly dependent on external sources of financing. If the pandemic continues to disrupt financial markets, it could adversely affect the company’s access to the debt markets, causing significant disruption in the businesses’ normal functioning.

Decent Growth Expectation

Analyst expects COST’s revenues to rise 13.5% year-over-year to $42.14 billion in the current quarter, ending May 2021.  A consensus EPS estimate of $2.23 for the third quarter represents  an 18% improvement from its  year-ago value. Revenue and ESP for the current fiscal year are expected to increase 12.1% and 13.8% year-over-year, respectively. Analysts further expect the company’s EPS to rise at a CAGR of 8.6% over the next five years.

Mixed Valuation

In terms of forward-12-month price/sales, the stock is currently trading at 0.81x, which is 48.3% lower than the industry average 1.56x. However, in terms of forward-12-month non-GAAP price/earnings, the stock is currently trading at 34.31x, 63.4% higher than the industry average  20.99x. This indicates, somewhat,  that the company’s top-line growth is not in sync with its  bottom-line.

POWR Ratings Don’t Indicate Sufficient  Upside

COST has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. COST has a C grade for Momentum also,  which is in sync with its 18.6% gains over the past year and 7.3% loss over the past three months.

Also,  COST has a C grade for Value. This is justified given its forward price/earnings ratio of 34.31x, which  is 63.4% higher than the industry average  20.99x, but its forward price/sales ratio of 0.81x is 48.3% lower than the industry average  1.56x.

COST is ranked #26 of 40 stocks in the A-rated Grocery/Big Box Retailers industry.

Click here to see COST’s POWR Ratings for Growth, Stability, Sentiment, and Quality.

Better than COST: Click here to access five top-rated stocks in the Grocery/Big Box Retailers industry.

Despite the stock delivering a decent return over the past year, COST’s growth potential looks weak given the near-term uncertainties related to its business environment. So, we think investors should hold off r on investing in COST in the near term.

Click here to checkout our Retail Industry Report for 2021

Bottom Line

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COST shares were trading at $343.04 per share on Thursday morning, up $5.00 (+1.48%). Year-to-date, COST has declined -8.78%, versus a 3.24% rise in the benchmark S&P 500 index during the same period.

About the Author: Rishab Dugar

Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...

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