COST Stock: A Bargain After Costco Wholesale Corporation Earnings?

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If you own Costco Wholesale Corporation (COST) stock, the market hasn’t given you much to celebrate recently. Going into Wednesday afternoon’s earnings report, shares were down 10.5% in 2016 and up just 0.6% in the last year.

Costco COST

Well, you can do a little victory dance today. COST stock is up more than 5% in early trading today after putting together a solid quarter.

Let’s take a look at what Costco did right last quarter and why Wall Street loves it so much today.

COST Stock: A Model of Efficiency

Costco’s earnings per share came in at $1.24, two cents better than the $1.22 per share analysts expected. Revenue fell a little short, however: Wall Street wanted $27.1 billion but instead got revenue of $26.8 billion, up 2.6% year-over-year.

Not a blowout quarter by any measure, but considering what lies ahead for Costco, I understand why COST stock is doing well today.

Same-store sales, excluding currency rate fluctuations and the impact of gasoline price deflation, rose 3% in the U.S., 8% in Canada, and 3% internationally. Costco’s largest rival, Wal-Mart Stores, Inc.’s (WMT) Sam’s Club, saw adjusted same-store sales in the U.S. rise just 0.1% last quarter.

That’s not the only place where Costco has the upper hand against its rival. Membership fees at Costco rose 5.8% year-over-year, while they rose just 3.9% at Sam’s Club last quarter.

In the stock market, growth is always relative. While 2.6% revenue growth and 6% EPS growth is nothing to write home about, COST stock owners realize that outperformance relative to Sam’s Club is always a good thing.

Plus, there’s plenty of room for improvement: Last quarter was the last full quarter under its American Express Company (AXP) deal; beginning on June 20, Visa Inc (V) will be the sole credit card vendor for the discount bulk retailer. COST stock owners have been waiting for this day for some time.

Not only will this expand the number of potential Costco shoppers (far more people carry Visa than AmEx), but it should improve Costco’s margins. American Express takes a bigger percentage of each sale than Visa does.

COST stock owners should also know that membership fees have room to increase once more, almost any day now. The last time fees were raised was in 2011, when they rose $5. Given a renewal rate between 85% and 90%, it’s fair to say another $5 bump is probably economical.

In a tumultuous market like today’s, consistent performers like Costco are hard to find.

Add to that the fact that COST stock pays a modest 1.2% dividend — the dividend payment has been raised annually for 12 years now – and it’s hard not to like this company.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/cost-stock-costco-wholesale-corporation-earnings/.

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