Costco (COST): The Steady Increaser of Earnings is Getting Overpriced

Costco, the membership-based bulk retailer, has one of the steadiest track records for increasing earnings in the last decade. Earnings per share—how much the company makes divided by the number of shares outstanding—have increased every year since 2010.

Cory Mitchell, an analyst with Trading.biz commented on Costco “It is a juggernaut. The company has increased earnings steadily year after year, and shareholders have been rewarded for that. Over the last decade, an investor in Costco made 3.5x as much as someone invested in the S&P 500.

Industry analysts are still projecting Costco will be able to increase yearly earnings at a higher rate than most S&P 500 companies over the next five years. It’s a solid company, yet right now the stock is near one of its highest P/E levels ever. It is overpriced.”

The average yearly EPS again is 13.7% over the last decade. For comparison, the median EPS yearly growth rate for S&P 500 stocks is 8.6% over the last 10 years. Put differently, Costco has grown, on average, 59% more per year than a typical S&P 500 stock.

Costco’s strong earnings growth has contributed to strong stock price performance. The stock has an annualized return versus the S&P 500 of 12%. That means COST has beaten the S&P 500 returns by 12% per year over the last decade. The S&P 500 has 13% annualized returns over the last decade.

Costco has returned 25% annualized or a total return of 831%, including dividends, over the last decade.

The following chart shows COST versus the SPDR S&P 500 ETF (SPY) over the last five years.

According to StockRover, here’s how earnings have increased in each year relative to the prior year.

• 2023: +10.9%
• 2022: +13.8%
• 2021: +19.4%
• 2020: +15.5%
• 2019: +14.4%
• 2018: +17.2%
• 2017: +14.8%
• 2016: +2.6%
• 2015: +11%
• 2014: +3.7%

The last time Costco had a year where earnings dropped was 2009 when the financial crisis was underway. The company was still profitable, but earnings were lower than the year prior.

It is a solid company. The only red flag for potential Costco investors currently may be the price of the shares. They are trading at a very high valuation. The Price/Earnings or P/E is 55 and was recently as high as 55.6 which is the highest reading in more than a decade.

Over the last five years, when the P/E dropped to near 35 or below it was a favorable buy point. When the P/E is over 45, that means the stock is priced quite high relative to historic values.

A high valuation doesn’t mean the price can’t keep going up. The P/E has been above 45 throughout 2024 and the stock is up 36% year to date. Yet the 45 P/E at the start of the year was quite a bit lower than the current 55 reading.

Investors may also want to consider that at a time when the company is valued at its highest, it is expected to grow earnings less than it has in the past. Over the last 10 years, the average yearly EPS growth was 13.7%. Going forward, analysts are projecting 9.9% yearly EPS growth over the next five years.

Costco is a solid company to own in the long-term portfolio. Right now it is priced very high relative to historic P/E levels. Yet it is not a company to bet against. It has steadily increased earnings, and its share price has outpaced the S&P 500 by a significant margin. It may well continue doing those things for the next five years or more.