- Costco reported a strong quarter, but there are two things wrong with the report.
- Power was priced to market following similar results from BJ’s Wholesale Club.
- Costco’s stock pullback could be a buying opportunity.
Costco (NYSE: COST) put in a strong quarter, but there are two things wrong with the report that means the strength was already priced into the market. The first is a similar report from BJ’s Wholesale Club (NYSE: BJ) last month, a report that showed strength in the membership club arena as buyers look for bargains. That means a pullback in stock prices for Costco that could set the market up for another big buying opportunity. The question is whether the support market will start sooner or later and there is a risk that the stock will fall to the $400 level or below. Trading at 37 times its earnings outlook, the stock is expensive compared to the broad market S&P 500 (NYSEARCA: SPY) and its ilk, and that could pose a problem in the short term. BJ’s Wholesale Club and Walmart (NYSE: WMT)parent of Sam’s Club, trades at 22 times earnings, which provides a deep discount to Costco.
Costco moves lower on strong Q4 results
Costco had a great quarter, bringing in $72.09 billion in revenue, up 15% from last year, but only beating the consensus estimate by 0.1%, which isn’t saying much. Growth is also a slowdown from last quarter and last year, but only by about 100 basis points, making this the 5th consecutive quarter of revenue growth in the 15% to 18% range. Earnings came from a systemwide gain of 10.4%, boosted by a higher store count. Growth was stronger in the US, with a gain of 15.8%, or 9.6% on an X-fuel basis, better than the Marketbeat.com consensus of 9.3%. E-commerce, a pillar of the company’s strategic development, is up 7.1%.
The margin is the second error in the report. The company produced a solid margin for the quarter and year, but the $4.20 in GAAP EPS is just what was expected. In light of the small margin of overperformance at the top, this result is weaker than it should be, if only slightly. The bottom line here is that market expectations have not been met, there are some signs of margin contraction and this is weighing on share prices. The company gave no official guidance, but it can be expected to increase companies and open new stores next year. The question is how strong the growth will be, and is it likely to slow down simply because of the law of large numbers, if anything.
Costco can increase its member memberships to boost its top and bottom line performance, but it would have to be a significant increase to really move the needle. The company reported $4.22 billion in membership fees for the past year, which is about 1.85% of the company’s revenue. A 10% increase in membership fees would increase the net by only 20 basis points, which is not much at all. The risk, however, is that Sam’s Club membership is smaller and may drive customers away from Costco in overlapping territories.
The technical outlook: Costco may enter a reversal
Costco shares have spotted a nice Head & Shoulders reversal pattern over the past nine months or so, and they only need to confirm the pattern to enter a deeper decline. The neckline of the pattern is near the $470 level, and that is very close to where the pre-market action is priced at Costco. A move below this level would confirm the pattern and could take the market to the $380 level or lower. If, however, the market finds a solid bottom at the $470 level, investors should expect Costco to continue to move sideways and eventually continue its uptrend and retest the $600 level.
Costco Wholesale is part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.