Costco Wholesale Corporation's (NASDAQ:COST) Shareholders Might Be Looking For Exit

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Costco Wholesale Corporation (NASDAQ:COST) as a stock to avoid entirely with its 50.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Costco Wholesale has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Costco Wholesale

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Costco Wholesale.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Costco Wholesale would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. The latest three year period has also seen an excellent 56% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 10% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.9% per annum, which is not materially different.

In light of this, it's curious that Costco Wholesale's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Costco Wholesale's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for Costco Wholesale you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.