Costco Wholesale Corporation (NASDAQ:COST) shares are up more than 1.75% this year and recently increased 2.14% or $3.96 to settle at $189.38. Big Lots, Inc. (NYSE:BIG), on the other hand, is up 2.35% year to date as of 01/11/2018. It currently trades at $57.47 and has returned 1.45% during the past week.
Costco Wholesale Corporation (NASDAQ:COST) and Big Lots, Inc. (NYSE:BIG) are the two most active stocks in the Discount, Variety Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect COST to grow earnings at a 9.54% annual rate over the next 5 years. Comparatively, BIG is expected to grow at a 13.20% annual rate. All else equal, BIG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 7.91% for Big Lots, Inc. (BIG). COST’s ROI is 16.00% while BIG has a ROI of 20.70%. The interpretation is that BIG’s business generates a higher return on investment than COST’s.
If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, COST’s free cash flow was 0.92% while BIG converted 0% of its revenues into cash flow. This means that, for a given level of sales, COST is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. COST has a current ratio of 1.00 compared to 1.70 for BIG. This means that BIG can more easily cover its most immediate liabilities over the next twelve months. COST’s debt-to-equity ratio is 0.00 versus a D/E of 0.66 for BIG. BIG is therefore the more solvent of the two companies, and has lower financial risk.
COST trades at a forward P/E of 26.01, a P/B of 7.49, and a P/S of 0.63, compared to a forward P/E of 12.31, a P/B of 4.26, and a P/S of 0.46 for BIG. COST is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. COST is currently priced at a -5.29% to its one-year price target of 199.96. Comparatively, BIG is -2.08% relative to its price target of 58.69. This suggests that COST is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for COST and 2.10 for BIG, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. COST has a beta of 0.99 and BIG’s beta is 0.92. BIG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. COST has a short ratio of 4.01 compared to a short interest of 12.80 for BIG. This implies that the market is currently less bearish on the outlook for COST.
Big Lots, Inc. (NYSE:BIG) beats Costco Wholesale Corporation (NASDAQ:COST) on a total of 8 of the 14 factors compared between the two stocks. BIG has higher cash flow per share, is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, BIG is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, DLTR has better sentiment signals based on short interest.