Costco vs. Walmart: Which Retail Giant Should You Buy?

Economic indicators point to uncertainty, but you would not know that from the financial results of Walmart (NYSE: WMT) and Costco (NASDAQ: COST). Despite being mature companies, these enterprises continue to post rising sales and improving profits.

Such results may indicate that both stocks are buys. However, given the state of both Walmart and Costco, one likely stands out over the other.

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The stock to choose

Under current circumstances, investors should probably lean toward Walmart stock.

Indeed, this is not a clear decision in some respects. In terms of sales performance, the two companies are similar, as both grew net sales by 6% annually in their most recent quarters.

Also, the profit picture does not necessarily offer clarity. Walmart grew net income by 34% year over year, compared with Costco's 11%. Nonetheless, Costco's net income was largely in line with its operating income, rising 10% over the same period. This stands in stark contrast to Walmart, whose operating income fell by less than 1% as it spent more heavily on operating, selling, general, and administrative expenses.

Although that spending could profit Walmart longer-term, investors should keep in mind that its profit increase in the most recent quarter came primarily from unrealized investment gains.

Instead, what makes Walmart stand out is its valuation. Although Costco's P/E ratio has fallen recently, its earnings multiple of 50 is unusually high for a mature retailer.

In comparison, Walmart sells at 36 times earnings. While the 30 average P/E for the S&P 500 suggests Walmart stock is not a bargain, it appears reasonable in comparison to Costco.

Admittedly, Walmart and Costco are two of the world's most prominent retailers, and both companies are on track to stay on a growth trajectory. Nonetheless, with sales growing at approximately the same rate, Walmart's lower P/E ratio likely makes it the better buy between the two.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.