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Stock Market Analysis

Will Costco’s share price keep gaining in a second-wave?

Costco’s share price has surged 15.8% in the past three months, and 5.55% since the start of October (through 14 October’s close). 

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Driving these gains are customers spending more money on their homes during the pandemic, with Costco’s [COST] under-appreciated e-commerce business also seeing huge growth. Can Costco’s share price keep up this amazing run of form, or is there a drop ahead?

What’s happening with Costco’s share price?

Costco’s share price has surged as customers stock up during the pandemic. Over the past three months, net sales have been steadily increasing. September saw sales of $16.84bn, up 16.9% from August’s $13.56bn, which itself was better than the $13.04bn seen in July. September also saw strong same-store sales, gaining 15.5% as shoppers’ habits change to favour stocking up.

In Costco’s last set of quarterly results, sales for the three months up to 30 August came in at $52.28bn, up from $46.45bn last year. Earnings were also higher at $3.13 per diluted share, compared to the previous year’s $2.47 per diluted share. Analysts had been expecting $2.80 a share on sales of $52.1bn. 

E-commerce made up 6% of sales in the year just gone — a rapidly increasing area of consideration for those watching Costco’s share price. In the 16 weeks to 30 August, e-commerce sales had grown 90.6% compared to the same period last year. Same-store sales for Costco grew 11.4%, Costco’s biggest ever year-on-year jump.

Why Costco is seeing bumper growth

Costco’s business model allows customers to shop a limited range of goods for less at its warehouses. According to Statista, Costco has 98.5 million members, up from 76.4 million members in 2014.

With the recent surge in coronavirus cases, Costco’s share price could continue to climb as people stock up on essentials and look to reduce trips to the store. The bulk of the company’s revenue comes from food and sundries, which accounted for 42% of fiscal 2020 sales, but Costco’s diverse range of items has seen it benefit from a shift in consumer behaviour.

“As people are spending less on travel, air and hotel and dining out, they seem to have redirected at least some of those dollars to categories like lawn and garden, furniture, mattresses, exercise equipment, bicycles, housewares, cookware, domestics and the like,” Costco CFO Richard Galanti said in a conference call on Thursday.

Of course, the recent surge could see a reversal if the pandemic starts to wane. However, Costco was growing before the coronavirus hit, up over 43% in 2019. The stock also carries a 0.74% forward dividend yield, although its 42.13X price to earnings multiple is expensive compared to rival Walmart’s 23.23X.

Where next for Costco’s share price?

The business’ recent strength, including its e-commerce business and growing margins, should push Costco’s share price up according to analysts at Barclays. The bank upped its Costco price target from $330 to $400, which would see a 5.73% upside, and put an Overweight rating on the stock.

Analysts tracking Costco’s share price on Yahoo Finance have an average $368.07 price target. Hitting this would see a 2.8% downside on the current share price (as of 14 October’s close). Of the 29 analysts offering recommendations on Yahoo Finance, seven rate the stock a Strong Buy and 11 a Buy.

Slightly more bearish are analysts at Raymond James, with a $355 price target on the stock. Hitting this would represent a 6.2% downside on Costco’s share price through 14 October’s close.

“Costco’s consistent revenue growth across merchandise categories reinforces our view that the membership model is arguably the most attractive business model in hardline retail today,” said Raymond James analysts.

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