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Costco share price forecast Q3 2021

costco stock forecast

Discount retailer Costco (COST) is set to release its fiscal fourth-quarter 2021 results after the close of markets on Thursday. What’re analysts expecting from the earnings and what’s the forecast for the shares in 2021?

With a year-to-date rise of almost 21%, Costco shares are slightly outperforming the S&P 500. The shares outperformed the benchmark in 2020 also with a rise of 33%. Last year, it also paid a special dividend of $10 per share amid the spike in earnings despite higher costs related to the COVID-19 pandemic.

US retail shares

The earnings of US retail companies have generally been better than expected. Macy’s delivered stellar results last month. However, Five Below shares had tumbled after the earnings release.  Looking at the macro environment, US retail sales fell in July and the fall was worse than what economists were expecting. However, they bounced back in August and rose 0.7% while markets were expecting them to fall 0.8%. After excluding sales of vehicles, which has been hampered due to the chip supply situation, retail sales increased 1.8% which was way above the 0.1% rise that analysts were expecting.

Costco earnings estimates

Coming back to Costco earnings, analysts polled by TIKR expect the company to post revenues of $61.4 billion in the fiscal fourth quarter that ended in August. The revenues are expected to rise 15.1% in the quarter. For the full fiscal year, analysts see the discount retailer’s sales rising 9.2%.

In the fiscal fourth quarter, analysts expect Costco’s EPS to rise 16.2% to $3.53. Its full year EPS is expected at $10.71, 16.1% higher than the previous fiscal year.

Costco facing cost pressures

During the previous earnings call, Costco talked about inflationary pressures from several quarters including higher wage costs, higher commodity prices, and higher transportation costs. In response to an analyst question on how the inflationary pressure could impact the company’s gross margins going forwards, CFO Richard Galanti said “we’ll have to wait and see.”

While he admitted that inflation has impacted the company’s gross margins slightly, he said that it is not a major impact so far. He commented, “while historically, we want to mitigate those increases and work with our vendors and try to be as efficient as possible to lower those pressure points, some of it will pass through, and some of it has passed through.”

Shares fell after the third-quarter earnings

Meanwhile, despite posting stellar earnings in the fiscal third quarter, Costco shares had fallen. Some of the analysts expect the shares to fall after the fourth-quarter earnings call also.

Barclays analyst Karen Short believes that the rise in earnings is already priced in the stock even as she raised her earnings estimates for the company. Oppenheimer analyst Rupesh Parikh also echoed similar views and said that he sees “limited earnings upside” in Costco shares. He added, “In addition, following the recent outperformance, we believe the robust and accelerating comp trends reported in recent months are now reflected in shares. As a result, we see the set-up on the print as less attractive.”

Analysts on Costco shares

Meanwhile, not all analysts seem to believe that the positives are baked in Costco shares. Jefferies, for instance, raised the target price to a street high of $525. “We see potential upside to our FY22 profit est. based on [gross margin] +6 [basis points] and SG&A modeled flat as % of sales, which we view as conservative given potential for mix benefits & leverage,” it said in its note.

Costco share price forecast

According to the forecasts compiled by CNN Business, Costco’s median price target is $475, which is a premium of 3.4% over current prices. Its highest price target of $525 is a premium of 14.3% over current prices, while its lowest price target of $385 is a 16.2% discount to the current share price.

Of the 32 analysts covering Costco shares, 21 rate is as a buy or higher while the remaining 10 rate it as a hold. One analyst has a sell rating on the shares.

Valuation

To be sure, Costco’s valuation multiples look a bit stretched. Currently, the shares trade at an NTM (next-12 months) PE multiple of 40.6x. To put that in perspective, the multiples have averaged 36.5x over the last one year. Looking at the long-term picture, the multiples have averaged 33.7x, 31.1x, and 27.7x respectively over the last three years, five years, and ten years respectively.

That said, the broader market valuations, including that of other retail shares, is also at a premium to the historical averages. Overall, Costco is among the best retail shares to buy and bet on US consumers’ spending appetite.

If the shares fall after the earnings release as some analysts seem to believe, it could be a good buying opportunity. Costco shares were trading lower at $455.90 in US premarket price action today. The shares have a 52-week trading range of $307-$469.77.

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About Mohit Oberoi PRO INVESTOR

Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation. Mohit has also written for Market Realist, The Economic Times, Wall Street Desk, and Talk Markets.

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