COST: Walmart vs. Costco: Which Stock is a Better Buy?

Walmart Inc. (WMT) and Costco Wholesale Corporation (COST) are two of the world’s largest established retailers. WMT is engaged in the operation of retail, wholesale, and other units in various formats internationally, while COST is engaged in the operation of membership warehouses in 8 countries.

Both companies have focused on their online operations to support sales during the pandemic. With a loyal consumer base, both WMT and COST are well positioned to gain in the coming months.

While WMT has returned 149.6% over the past five years, COST gained 123.9% over the same period. In terms of year-to-date performance, COST is the winner with 27.1% returns versus WMT’s 25.3%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

WMT launched Walmart +, which is a new membership for the customers. Expanding the benefits for its customers, the company removed the order minimum to qualify for free shipping. Walmart+ members now receive free next-day and two-day shipping on items shipped by Walmart regardless of the order’s dollar amount. The company also announced attractive deals for the Black Friday and Cyber Monday.

Ahead of Christmas, WMT announced that it will be delivering Christmas trees and will even install decorative lights on request. The company announced new drone delivery pilot programs in the United States with Zipline, Flytrex and DroneUp. WMT also announced a pilot program with Cruise, an all-electric self-driving car company, to test grocery delivery.

Earlier this month, COST announced that Beyond Meatballs of (BYND) will be sold nationwide in select stores of COST. The company started selling the Beyond Burger in late 2019. COST’s e-commerce sales received a boost amid the pandemic. The company launched CostcoGrocery to deliver non-perishable items to buyer’s homes. It also partnered with Instacart which facilitates same-day delivery of groceries to shoppers.

COST has acquired Innovel Solutions, a leading provider of third-party end-to-end logistics solutions. The company has been expanding internationally and opened 13 new warehouses this year. A couple of months ago, COST began selling coronavirus testing kits, (Covid-19 Saliva PCR Test Kits) on its website. The tests are not invasive and can easily be done at home.

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Recent Financial Results

WMT’s revenue surged 5.2% year-over-year to $134.7 billion for the quarter ended October 2020, primarily driven by increased demand for products across multiple categories.

WMT’s net sales from Walmart U.S. segment increased 6.2% year-over-year to $88.4 billion. Sam’s club’s net sales increased 8.3% year-over-year to $15.8 billion. And Walmart U.S. e-Commerce sales increased 79% year-over-year with strong results across all channels. Consolidated net sales increased 5.3% year-over-year to $133.8 billion. EPS of $1.34 surpassed the consensus estimate by 13.6%.

COST’s revenue for the 16 weeks ended August 2020 increased 12.4% year-over-year to $53.4 billion. EPS of $3.04 surpassed the consensus estimate by 7%. The company’s net sales for the four weeks ended November 2020 increased more than 15% year-over-year to $15.7 billion. Comparable sales from e-commerce increased 71.3% over the same period.

Past and Expected Financial Performance

WMT’s revenue and EPS grew at a CAGR of 3.5% and 22.5%, respectively, over the past 3 years. Also, the company’s EBITDA grew at a CAGR of 5% over the same period.

The market expects the company’s revenue to increase 5.9% in 2021, and 0.4% in 2022. WMT’s EPS is expected to grow 8% in the current quarter ending January 2021, 13.2% in 2021, and 3% in 2022. Moreover, its EPS is expected to grow at a rate of 6.8% per annum over the next five years.

COST’s revenue and EPS grew at a CAGR of 8.9% and 14.1%, respectively, over the past 3 years. Also, the company’s EBITDA grew at a CAGR of 11.8% over the same period.

The market expects COST’s revenue to increase 8.5% in 2021, and 7.3% in 2022. The company’s EPS is expected to grow 12.4% for the quarter ending February 2021, 12.1% in 2021, and 9.9% in 2022. Moreover, COST’s EPS is expected to grow at a rate of 7.4% per annum over the next five years.

Profitability

WMT’s trailing-12-month revenue is 3.29 times what COST generates. Moreover, WMT is more profitable with a gross margin of 24.8% versus COST’s 13.2%.

Also, WMT’s leverage free cash flow margin of 4.9% compares favorably with COST’s 3.2%.

Valuation

In terms of forward P/E, COST is currently trading at 38.10x, 42.3% more expensive than WMT which is currently trading at 26.78x. Though WMT is less expensive in terms of trailing-12-month P/S (0.77x versus COST’s 0.99x), its forward PEG of 3.85x is 0.5% higher than COST’s 3.83x.

In terms of trailing-12-month price/cash flow, COST’s 18.59x is 48.2% higher than WMT’s 12.54x.

Though COST looks more expensive compared to WMT, it may be worth paying this premium considering COST’s higher earnings growth potential.

POWR Ratings

WMT and COST are rated “Strong Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for WMT and COST:

Both WMT and COST have an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank and a “B” for Peer Grade. While WMT is ranked #1 out of 18 stocks in the Grocery/Big Box Retailers industry, COST is ranked #2 in the same industry.

The Winner

Both WMT and COST are good investment bets considering their market dominance and continued expansion. However, COST appears to be a better buy despite trading at a marginally higher valuation based on its higher earnings growth potential.

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COST shares were trading at $372.92 per share on Monday afternoon, down $0.51 (-0.14%). Year-to-date, COST has gained 27.96%, versus a 16.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...