Should Costco Stock Be in Your Portfolio Pre-Q3 Earnings?

Costco is set to release its Q3 fiscal 2025 earnings on May 29, with analysts anticipating a 7.9% year-over-year revenue increase to $63.1 billion and a 12.4% rise in earnings per share to $4.25. While Costco's membership model and competitive pricing have driven a 24% stock rally over the past year, outperforming its industry, its forward P/E ratio of 52.28 suggests a premium valuation compared to peers; the Zacks model does not conclusively predict an earnings beat this quarter due to a negative Earnings ESP.

Analysis

Costco Wholesale Corporation (COST) is scheduled to report its third-quarter fiscal 2025 earnings on May 29, with analysts anticipating robust growth. The Zacks Consensus Estimate for revenue is $63.1 billion, representing a 7.9% year-over-year increase, while the earnings per share (EPS) estimate, recently revised up by $0.01, stands at $4.25, implying a 12.4% year-over-year jump. Costco's historical performance includes an average trailing four-quarter earnings surprise of 0.8%, though it missed the consensus estimate by 1.7% in the last reported quarter. The company's strategic initiatives, including a customer-centric approach, competitive pricing, and a strong membership model with renewal rates often exceeding 90%, are expected to drive this performance. Specific expectations for Q3 include a 4.7% rise in comparable sales (5% in the U.S., 4.1% in Canada, and 4.2% in Other International locations), a 9.6% increase in membership fees, and a significant 21% jump in e-commerce comparable sales. Despite these positive indicators, the Zacks model, with an Earnings ESP of -0.61% and a Zacks Rank #2 (Buy), does not conclusively predict an earnings beat. Potential headwinds include inflationary pressures and margin monitoring, with SG&A expenses projected to increase 6.4% year-over-year. Costco's stock has rallied 24% over the past year, outperforming its industry's 12.5% rise and key competitors. However, its current forward 12-month P/E ratio of 52.28 is notably above its industry average (33.09), the S&P 500 (21.36), and its own median P/E (50.54), indicating a premium valuation.

Key Decisions for Investors

• Investors should weigh Costco's strong growth prospects, resilient business model, and consistent execution against its premium valuation and the uncertainty surrounding an earnings beat in the upcoming Q3 report, as indicated by the negative Earnings ESP.
• Current shareholders may consider holding their positions, given the company's robust fundamentals and long-term strategic initiatives, while those with a higher risk tolerance might see opportunities to add to positions, particularly if they have a long-term outlook.