Comparison: Walmart vs. Costco – Which Stock is the Better Investment?

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Comparison: Walmart vs. Costco – Which Stock is the Better Investment?

Walmart (NYSE:WMT) And Costco (NASDAQ: COST) have certain attributes in common. Both retailers have achieved great success by offering buyers low prices. And they have rewarded their shareholders handsomely over the years.

They have simple businesses with management that works very well. Both appear well positioned for the future.

But which one offers the best opportunity to investors?

Comparison: Walmart vs. Costco – Which Stock is the Better Investment?

Image source: Getty Images.

Walmart

Since opening its first discount store more than sixty years ago, Walmart has focused on cutting costs and passing those savings on to customers in the form of low prices. It has adapted over the years by offering omnichannel capabilities and a subscription service to keep pace with online retailers such as Behemoth. Amazon (NASDAQ:AMZN).

Walmart has a reputation as a low-cost retailer. Since everyone likes low prices, this attracts customers in all kinds of economic environments. In fact, people find it particularly attractive during economic downturns because they are hungry to save money.

Revenues and profits continue to increase. During the fiscal fourth quarter, which ended Jan. 31, adjusted revenue increased 4.9% to $172.1 billion. This removes foreign currency conversion effects. Adjusted operating profit increased by 10.9%.

Management continues to move Walmart forward. That includes its advertising business, which grew 28% to $3.4 billion last year. He’s looking to give the company a boost with the recently announced $2.3 billion acquisition of Vizio. The smart TV maker makes money through advertising in a variety of ways.

Walmart’s stock price has gained more than 34% over the past year. Despite the gain, the title price/earnings ratio (P/E) the ratio remains at 31.

Even though the stock saw an impressive increase, it kept pace S&P500It’s a gain. The market is trading at a P/E multiple of 23. Although Walmart shares have a higher valuation, the company has consistently increased its profitability and recently expanded its advertising business.

Costco

Costco also provides value to customers, but the way they do business is different. It charges its members an annual membership fee to shop in its warehouses. These immense spaces offer numerous goods and services – virtually everything under the sun. Costco generally sells high-quality products, often in bulk, at attractive unit prices.

It continues to attract new members and retain old ones. Membership increased from 72 million to 73.4 million in the last three months. And retention systematically hovers around 90%.

Costco continues to increase its revenue and profitability. Its second-quarter revenue rose 5.7% to $58.4 billion, and its operating profit rose 8.4% to $2.1 billion. Although management has postponed increasing member dues, when it decides to implement one, it will likely improve revenue and profits even further. Members do not appear ready to balk, given the high retention rate, and it has been seven years since the last dues increase.

Members continue to find Costco’s membership proposition attractive. This helped it generate consistently higher profitability, even during difficult economic times. That means the shares, which are up 56% over the past year, aren’t cheap.

Costco stock has a P/E of 50, up from 36 a year ago. No one will argue that this is a cheap valuation. But the company continues to increase its sales and profits. And its growth potential is greater because it regularly opens new warehouses every year.

Decision

Walmart and Costco have strong businesses. This makes it a difficult decision.

Despite the stock’s richer valuation, I prefer Costco stock over Walmart stock. It continues to have growth opportunities and opened four warehouses in the last quarter. Management has delayed raising prices, which I find commendable given the impact inflation has on people. But it will increase contributions at the appropriate time, further boosting profitability growth.

Paying a higher valuation seems justified given Costco’s strong attributes.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA holds positions at Costco Wholesale. The Motley Fool posts and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.

Best Stock to Buy Right Now: Walmart vs. Costco was originally published by The Motley Fool

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