Should You Pick Coca-Cola Stock Over Costco?

Given its better prospects, we believe Coca-Cola stock  (NYSE: KO) is a better pick than its sector peer Costco stock (NASDAQ: COST). Although both companies are from the Consumer Defensive sector, KO stock trades at a higher valuation multiple of 5.9x revenues, versus 1.4x for Costco. This can partly be attributed to Coca-Cola’s superior profitability. In the sections below, we discuss why we believe KO will offer higher returns than COST in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Coca-Cola vs. Costco: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Costco Stock Has Outperformed Coca-Cola In Recent Years

KO stock has witnessed gains of 20% from levels of $55 in early January 2021 to around $65 now, while COST stock has seen extremely strong gains of 110% from levels of $375 to $795 over the same period. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.

However, the increase in KO and COST stocks has been far from consistent. Returns for KO stock were 8% in 2021, 7% in 2022, and -7% in 2023, while that for COST were 51%, -20% and 45% over the same period, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that KO underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could KO and COST see a strong jump? We think Coca-Cola stock will fare better than Costco in the next three years.

2. Costco’s Revenue Growth Is Better

Coca-Cola has seen its revenue rise at an average annual rate of 11.6% from $33 billion in 2020 to $45.8 billion in 2023, while Costco saw its top-line expand at 13.4% from $167 billion to $242 billion over this period. For Coca-Cola, both at-home and away-from-home channels have grown, primarily driven by solid pricing trends. The North America and Latin America markets have been leading the growth, driven by better price realization. Of late, the company is seeing more traction in the away-from-home business than at-home beverages. This can be attributed to higher inflation and a shift in consumer spending behavior.

For Costco, despite the pandemic and higher inflation, the business has grown strongly, partly due to its membership income. The company is due for a membership fee hike for its 73 million paid household members. The membership renewal rate for Costco has remained strong, at 92.9% in the U.S. and Canada, while the worldwide rate came in at 90.5%. This high renewal rate not only ensures a steady stream of revenue from membership fees but also increases the lifetime value of each customer, thereby boosting overall profitability. Furthermore, high inflationary pressures on food is a burden for consumers, and retail companies such as Costco will benefit as cost savings are passed to customers. 

Our Coca-Cola Revenue Comparison and Costco Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, Coca-Cola is expected to see low single-digit average growth in the next three years, while Costco may see mid-single-digit average growth over this period.

3. Coca-Cola Is More Profitable But Costco Offers Lower Financial Risk

Coca-Cola’s reported operating margin slid from 29.5% in 2020 to 28.6% in 2023, while Costco’s operating margin remained at 3.3% over this period. Looking at the last twelve-month period, Coca-Cola’s operating margin of 28.8% fares better than 3.4% for Costco.

Looking at financial risk, Costco fares better, with its 2.5% debt as a percentage of equity lower than 15.5% for Coca-Cola and its 22% cash as a percentage of assets higher than 13% for the latter. This implies that Costco has a better debt position and more cash cushion.

4. The Net of It All

We see that Costco has seen better revenue growth and has a better financial position. On the other hand, Coca-Cola is more profitable. Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Coca-Cola will offer better returns in the next three years over Costco, given its better valuation.

If we compare the current valuation multiples to the historical averages, KO fares better. Coca-Cola’s stock trades at 5.9x sales compared to its last five-year average of 6.8x, and Costco’s stock trades at 1.4x revenues vs. the last five-year average of 1.1x. This implies that KO stock has a higher growth potential if the valuation multiples were to return to their historical averages.  Our Coca-Cola (KO) Valuation Ratios Comparison and Costco (COST) Valuation Ratios Comparison have more details.

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