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Costco vs. Target: Which Stock is a Better Buy?

The retail titans Costco (COST) and Target (TGT) have been laying the groundwork for a rise in e-commerce and curbside pickups for a long time. This has enabled them to capitalize significantly on the trend. Both companies have been growing their digital presence methodically and driving sales growth by, for example, constructing drive-up lanes at their stores for customers to retrieve their online orders more easily. But let’s find out which of these stocks is a better buy now.

The two retail giants — Target Corporation (TGT) and Costco Wholesale Corporation (COST) — have grown their businesses steadily  as demand for household goods and home office supplies ramped up amid the COVID-19 pandemic, with much shopping activity shifting online. These companies notched double-digit sales growth in their last reported quarters.

COST and TGT are both embracing new next generation growth initiatives by enhancing their digital platforms and their fast-growing, contactless options like in-store pickup and curbside pickup. The companies are meeting consumer needs for everything from pantry foods to apparels and are generating  surging e-commerce sales. This should help the companies grab share from rivals that are less adept and  cement relationships with customers for years to come.

While COST has gained 143% over the past five years, TGT has returned 178.1%. In terms of past six-month performance, TGT is the clear winner with 47.5% gains versus COST’s 5.5% returns.

But which of these stocks is a better pick now? Let’s find out.

Latest Movements

In December, COST announced that Beyond Meatballs will for the first time sell  its products at select COST locations nationwide. The company has also launched Costco Delivery, in partnership with Instacart, to provide same-day delivery services from 76 Costco warehouses across Canada.

In  January, TGT announced a limited-edition collection with Levi Strauss & Co. that will feature an assortment of home and lifestyle items. It  marks Levi’s first “Home” partnership. This new Levi’s limited-edition collection for  Target is set to be launched on February 28. The strategic partnership should allow TGT to offer its customers the best national brands alongside its  assortment of owned brands.

Recent Financial Results

COST’s total revenue has increased 16.7% year-over-year to $43.21 billion in its fiscal first  quarter ended November 22, 2020. The company’s net income grew 38.2% from the year-ago value to $1.17 billion, while its EPS increased 37.7% year-over-year to $2.63.

In the third quarter ended October 31, 2020, TGT’s total revenue  increased 21.3% year-over-year to $22.63 billion. Its operating income rose 93.1% from the prior-year quarter to $1.94 billion, while its EPS increased 44.5% year-over-year to $2.02 over the period. The company’s digital comparable sales grew 155%, accounting for 10.9% of TGT’s comparable sales growth.

Past and Expected Financial Performance

COST’s revenue and EPS have grown  at a CAGR of 9.2% and 15.7%, respectively, over the past three  years. Also, the CAGR of the company’s free cash flow has been 41.9% over this period.

Analysts expect the company’s revenue to increase 11.9% in the current quarter, and 10.3% in the current year. COST’s EPS is expected to grow 15.7% in the current quarter, and 15.5% in the current year. Moreover, its EPS is expected to grow at a rate of 8.6% per annum over the next five years.

In comparison,  TGT’s revenue and EPS grew at a CAGR of 8% and 16.6%, respectively, over the past three  years. The CAGR of its  free cash flow has been 11%.

Analysts expect TGT’s revenue to increase 17.1% in the current quarter, and 18.7% in the current year. The company’s EPS is expected to grow 48.5% in the current quarter, and 45.2% in the current year. Also,  TGT’s EPS is expected to grow at a rate of 13.8% per annum over the next five years.

Profitability      

COST’s trailing-12-month revenue is two times TGT’s. But TGT is more profitable, with a gross profit margin of 29.4% versus COST’s 13.2%.

TGT’s ROE and ROA of 30.7% and 8.2%, respectively, compare favorably with COST’s 27.8% and 7.2%.

Valuation

In terms of trailing-12-month non-GAAP p/e, COST is currently trading at 36.73x, 59.8% more expensive than TGT, which is currently trading at 22.99x. Also, its forward PEG of 3.61x is 149% higher than TGT’s 1.45x.

TGT looks much more affordable compared to COST.

POWR Ratings

COST has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. However, TGT has an overall rating of A, which translates to a Strong Buy.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

TGT has a Growth Grade of B, which is consistent with the expected growth in earnings and revenues. In comparison, COST has a Growth Grade of C.

Both COST and TGT have a grade of C for Momentum, which tracks  with their price returns over the past months.

In terms of Value Grade, both COST and TGT have a B rating, which are  consistent with their lower-than-industry price/sales ratio.

Of the 41 stocks in the Grocery/Big Box Retailers industry, COST is ranked #10 and TGT is ranked #1.

Our POWR Ratings system has also rated  COST and TGT for Stability, Sentiment, and Quality. Get all of COST’s ratings hereClick here to see the additional POWR Ratings for TGT.

The Winner

While both COST and TGT are good long-term investments because they are reaping handsome profits from  rising top-line revenues, TGT appears to be a better buy based on the factors discussed here.

While both are navigating the COVID-19 era with some success, TGT is a relatively cheaper and more profitable option to bet on the immense growth potential of the retail industry.

If you are looking for other top-rated stocks in the Grocery/Big Box Retailers industry, click here.

 

 

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TGT shares were trading at $192.80 per share on Wednesday afternoon, down $1.49 (-0.77%). Year-to-date, TGT has gained 9.22%, versus a 4.22% rise in the benchmark S&P 500 index during the same period.



About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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