I
was recently asked to do a report on Costco (COST), so here we go. For those who are unfamiliar with this
company, Costco operates membership warehouses that offer a selection of
branded and private label products in a range of merchandise categories. Costco is a $40.5B company that operates
605 total warehouses with 438 in the US and only 22 stores in Europe, all of
which are located in the United Kingdom.
Last
week, Costco reported slightly weaker-than-expected June same-store sales of a
3% increase when analysts were looking for a gain of 3.7%. They reported that net sales for the
month totaled slightly more than $9B; good enough for a 6% increase YOY. Sales for the first half of the year
were up 10% YOY at $80.46B.
Management cited lower gasoline prices did not have much of an impact on
June sales but does anticipate a positive impact in future months. With oil
prices near 9 month lows and I think will continue to stay low for the
foreseeable future, and natural gas prices trading below $3.00 per 10,000
million British thermal units, US companies will be major benefactors of the
lower commodity prices.
Looking
at analyst’s estimates, Costco is expected to earn $3.89/share in FY12 and
$4.42/share in FY13, giving it a forward P/E of 21. While that’s more expensive than competitors, Target and
Walmart, it is still relatively cheap compared to its historical P/E of about
24. Going back to the company
earnings, Costco has beaten estimates 8 of the last 10 times and I think that
continues going forward, meaning analyst estimates are too low. Back in May, Costco reported earnings
of $0.88/share which was up 20% YOY, with expanding operating margins. I think these trends continue. In FY11, Costco earned $3.30/share,
meaning that analysts are expecting an increase of 18% in FY12 and 13.6% in
FY13. On the company’s Q3
conference call, management was very impressed with new memberships and
renewals and expects that trend to continue. With energy prices dropping, consumers will have more money
to spend and if you have ever been to a Costco, you know they are spending a
lot of it there. I’m looking for
Costco to earn $3.96/share in FY12 (20% increase YOY) and $4.65/share in FY13
(17% increase YOY), meaning that Costco is trading at 20x FY13. So in all, I think it’s fairly valued
when you look at the earnings.
However, Costco has $5.98B in cash and only $1.37B in debt, giving it a
whopping $13.82/share in cash. That
doesn’t even compare to Walmart’s $2.40/share and Target’s $1.04/share in
cash. If you back out the cash,
COST is trading at just 17x FY13 earnings, which is a 41% discount from
historical levels, making it much cheaper than Walmart and Target.
The
next thing I looked at are monthly, weekly and daily charts and it doesn’t
matter which chart you look at because they are all bullish. Looking at May, COST put in a low at
$81.98 earlier in the month, only to rally and finish at $86.39, less than 3%
off the month’s high, putting in a morning star formation (where the stock
opens near the highs, trade lower, only to rally back and close at or near the
highs, often times higher than the open.
At the same time, the bar pierces the previous bar). That formation usually signals the
sell-off is over, and you want to get confirmation with the following bar, in
this case; June’s price action.
That is exactly what you got.
The stock rallied hard the entire month, putting in a monthly bullish
engulfing line (formation in which the body of June, engulfs the entire body of
May), with a low of $85.17 and at the time, a new all-time high of $95.11, only
to close at $95/share. When
looking at a weekly and daily chart, Costco looks to be building a bull flag,
which is more evident in the daily chart.
What’s better is that on June 29, the stock put in a gap between $93 and
$93.43. While that’s only about
0.50%, it’s very significant, as COST has failed to fill that gap, and instead is
building a rounded bottom with $93.18 as the floor.
Right
now there are 23 analysts covering the stock with an average price target of
$91.52, about 2.5% below Tuesday’s close.
Again, I think the analysts have this one wrong. Using a measured move from May’s low up
to the gap at $93, I see the stock hitting $104.45, another $10.65, or 11% of
upside from Tuesday’s close. If
you’re looking to trade this stock, this is a great entry point, stopping
yourself out at $92, which if COST fills the gap, $92.10 is the next floor that
should hold. If you want to invest
in the stock, this is still a great entry point, but put your stop loss at
$90.08, the low of the previous gap made on June 15, and just $0.05 below the
76.8% Fibonacci retracement from the 52-week high to 52-week low.
In
short, Costco is a great company with good growth and a terrific balance
sheet. What is more important is
that almost all of its’ business comes from the US. The stock has held up very strong in these choppy markets
and has been pushing new all-time highs almost on a daily basis. Costco is a very safe stock to be in,
with very little volatility, and with what we have seen over the last couple
months of trading, that’s always a good thing.
Full
disclosure: I hold no positions in COST, nor do I plan on entering into a
position in the next 72 hours.
Jeff Lewison
No comments:
Post a Comment