Better Buy: Costco (COST) vs. Target (TGT) Stock

Shares of Costco COST climbed to another new all-time high Thursday as investors show their love for the warehouse-style grocery chain amid nearly constant headlines about Amazon’s AMZN industry takeover. Meanwhile, Target TGT stock also surged to inch close to its 52-week high. So let’s see which stock looks better at the moment.

Industry Overview

Some worried that Amazon’s June 2017 purchase of Whole Foods would crush the traditional grocery world. Yet, today we are far away from an Amazon-dominated retail industry, much less a Jeff Bezos-controlled grocery market. Plus, consumers around the U.S. are likely far better off based on Amazon’s continued push into retail, grocery, and delivery because it has forced companies to innovate.

Giants from Walmart WMT to Kroger KR have jumped headfirst into delivery, online ordering, and much more. But Target and Costco have been two of the more successful grocery and discount retailers over the last year. 

Innovation  

Last quarter, Target introduced its online ordering and curbside pickup service called “Drive-Up” at more than 250 stores, expanded its “Restock” program—which allows customers to shop from thousands of popular items online for next day delivery—nationwide, and introduced same-day delivery from more than 700 stores.

Target was able to bolster its new-age offerings through its $550 million purchase of grocery delivery startup Shipt. The Minneapolis-based retailer saw its digital sales surge 28% in Q1, on top of a 21% climb in the year-ago period.

Costco launched two-day delivery for non-perishable food and household supplies nationwide last fall. The company also expanded its same-day delivery service to “most metropolitan” areas through an updated partnership with Instacart.

Stock Movement

Now let’s take a look at how COST and TGT stock have performed. Shares of Costco are up roughly 85% over the last five years, which outpaces the S&P 500’s 70% climb. Target, on the other hand, is up just around 8% during this time period. However, more recently, investors can see that Target and Costco are neck and neck and both crush the S&P’s 14% jump.

 

Valuation

Moving on, the two stocks present far different valuation pictures. Target stock is currently trading at 14.3X forward 12-month Zacks Consensus EPS estimates, which marks a discount compared to the S&P’s 17.4X and its industry’s 18.7X. TGT stock is also trading below its year-long high of 16.9X and not too far above its one-year median of 13.6X.

Meanwhile, COST is trading just below its year-long high at 28.5X and above its low of 23.6X. Clearly, some investors see a reason to pay a significant premium compared to the industry average for COST.

Furthermore, Target stock presents solid value compared to where it has traded at over the last decade, while COST sits near its 10-year high.

 

Outlook

Our current Zacks Consensus Estimates are calling for Target’s adjusted quarterly earnings to climb by 13%, with its full-year EPS figure projected to climb by 12% to hit $5.28. The company’s Q2 revenues are projected to reach $17.3 billion, which would mark 5.3% growth. For the full-year, Target’s revenues are expected to expand by just 2.3% to touch $73.52 billion.

Costco, which reported its fiscal third-quarter results at the very end of May, is expected to see its Q4 revenues climb by over 2% to $43.2 billion, with full-year revenues projected to climb nearly 9% to $140.51 billion.

Moving to the other end of the income statement, COST is projected to see its fourth-quarter earnings pop by 10%. Its fiscal 2018 earnings are expected to reach $7.05 per share, which would mark a 21% surge.

Bottom Line

Target has earned six upward earnings estimate revisions for its second quarter, with 100% agreement to the upside, over the last 60 days. Meanwhile, COST has received three upward changes against zero downward revisions for its current quarter, within the last 30 days.

Target and Costco are currently Zacks Rank #3 (Hold) stocks and sport “A” VGM scores. Clearly, both stocks have their appeal, and both companies look ready to compete in the modern retail age. But Target stock offers investors much better value at the moment.

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
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