Costco: Can Earnings Catch Up To Valuations? (COST)

May 28, 2008 by Douglas A. McIntyre

On Wednesday morning we’ll get to see earnings out of upscale warehouse retailer Costco Wholesale Corporation (NASDAQ: COST).  The estimates from First Call are $0.65 EPS on $16.3 Billion in revenues.  Next quarter estimates are $1.01 EPS and $22.44 Billion in revenues.  Costco is not on a typical retail fiscal year as its next quarter August is the fiscal year, and estimates are $2.99 EPS on $71.44 Billion in revenues. 

In case the company gives any estimates for next year, First Call has fiscal August 2009 at $3.43 EPS and $77.87.  This represents an expectation for growth next year of about 14.5% on earnings per share and about 9% revenue growth.

As far as valuations at a $73.00 share price with a $31.6 Billion market cap, this gives this fiscal year estimated valuations as 24.4 P/E ratio and 0.44-times revenues.  For 2009 the forward valuation numbers are 21.3 P/E and 0.4-times revenues.

There is a huge dilemma in Costco shares currently.  While this is somewhat opinionated as this is a personal favorite store, Costco has the best reputation and the highest net worth as far as its customer base among all warehouse or big-box sellers out there in the majors.  But its valuation is also far richer than peers and is seemingly a bit elevated.  Shares are actually only up about 5% for 2008 so far, but shares are up about 33% from its 52-week lows of $54.85 (year high is $75.23).

Analysts also have an average price target of roughly $70.00, which is under the current share price.  Unless Costco is able to pull out a feather from its hat with a magic surprise and significant raise of estimates, it’s probably time for a breather. 

Jon C. Ogg
May 28, 2008

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