Costco Earnings Preview: Fiscal Second Quarter 2010

Costco (COST: 60.86 +0.58%) is scheduled to report their fiscal second quarter 2010 results before the market opens on Wednesday, March 3rd. Based on analysis from EarningsPreviews.com, Costco is expected to report slightly better than expected quarterly results that exceed Wall Street’s consensus expectations.

Analyst Expectations

We are forecasting revenues of $18.55 billion and EPS of $.73. This would represent a 10% increase in revenues from last year’s $16.84 billion in the same period. The current analyst consensus estimates calls for revenues of $18.51 billion and EPS of $.71. The company has provided no earnings guidance.

Earnings Analysis

While Costco appears to be seeing improvement in their operating margins, we feel that severe weather that blanketed much of the nation over the last few weeks could limit any upside surprise. However, even accounting for slower traffic in February, we still expect earnings to increase 32% over last year.

Costco remains one of the most attractive growth stocks in the market today. We expect that membership numbers will increase as the economy continues to improve. However, we remain cautious on Costco’s ability to increase their membership fees. Increasing membership fee’s in the near-term could derail the expected growth plans.

Stock Performance

In 2009, Costco shares gained just under 13% and the stock underperformed the 19% gain in the Dow Jones industrial average. While the overall market has posted declines this year, Costco stock is up nearly 3% since the beginning of 2010.

Valuation

Costco is now trading at 19x consensus 2011 EPS estimates. This is a slight premium to the relative valuations of their peer group. Costco stores appear to have significant growth potential over the next few years, but the stock is trading close to our full valuation.

Recommendation: Hold with an $65 price target

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