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

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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