Costco Wholesale (COST 0.26%) delivered a stellar January sales report, with digital sales rising notably. The company has been building out a robust e-commerce platform for years, and it is starting to show. Costco said digitally enabled sales grew 34% year over year in January — a notable improvement from previous weeks.
After a recent pullback, the stock is now up about 15% year to date. The recent sales report builds on the strength seen in the last quarter, with consumers beginning to pick up spending on big-ticket items such as jewelry and appliances. Investors like to see this because these pricier items generally generate higher margins than food and sundries.
Image source: Getty Images.
However, the stock’s run raises concerns around its valuation. The shares are now trading at a price-to-earnings (P/E) multiple of 53. Even using forward earnings estimates, the stock trades at an expensive P/E of 49.
Usually, investors need to see much higher growth to justify this valuation level. Despite Costco’s strong digital sales performance, total net sales are still growing in the single-digit range — 9% year over year for January, and 8% in the fiscal first quarter ending Nov. 23.
Earnings per share have grown at an annualized rate of 11% over the past three years, and analysts are modeling long-term earnings growth of about 9%. That is very light growth for a stock priced around 50 times earnings. Several Magnificent Seven companies, in addition to consumer staples like Coca-Cola and Procter & Gamble, are trading at lower P/Es relative to earnings growth, offering investors better value for their money.
The stock is priced for flawless execution, which Costco excels at, but also for robust earnings growth, which isn’t happening. Investors should be cautious about buying shares at these levels, as stocks can’t outpace the business’s long-term growth. It might be wise to keep Costco on a watch list and consider buying it at a lower valuation.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
