Past Performance: In the past four years Costco (NASDAQ:COST) has missed EPS expectations three times. The last EPS miss came in the fourth quarter of 2011. Costco just reported an EPS beat on March 12th, reporting $1.10 per share versus expectations for $1.06 per share. YOY, Costco's earnings grew by more than 20% in Q2 from 2012 to 2013.
Costco's stock is trending towards overbought levels on a year evaluation. COST faces resistance at the all-time closing high of $105.98, and has support at $97. A breakout above the all-time closing high would be a very bullish signal for the stock. The fundamentals of the stock do show some weakness though.
Fundamentals: Currently, Costco trades with a P/E of 23.55, a forward P/E of 20.90, a P/S of 0.44, and a PEG of 1.74. Compare the P/E ratios to the consumer services sector and the S&P 500 average. The consumer services sector trades with a current P/E of 20.70 and a forward P/E of 24.4. Meanwhile, the S&P 500 trades with a P/E of 20.5 and a forward P/E of 17.2. Comparing the P/E ratios, both current and forward, Costco looks slightly overpriced compared to the sector and S&P 500 average.
The 1.74 PEG ratio combined with the overvalued P/E ratios reaffirms the slightly overvalued nature of COST. When Costco is compared to competitors like Wal-Mart (NYSE:WMT) and Whole Foods (NASDAQ:WFM), Costco is overvalued compared to Wal-Mart and cheaper than Whole Foods. Wal-Mart trades with a current P/E of 14.80, a forward P/E of 12.65, a P/S of 0.52, and a PEG of 1.54. On the other hand, Whole Foods trades with a current P/E of 33.11, a forward P/E 25.82, a P/S of 1.31, and a PEG of 1.64.
The Story: Costco is still growing on a YOY basis. In fact, Costco opened fourteen new locations in the first quarter of 2013 alone. The current valuation of the stock, however, illustrates that the stock is moving upwards beyond fair value on momentum. Any correction in the overall market typically brings momentum stocks down the hardest and quickest.
Management has illustrated a very competent approach, not taking any unnecessary risks. The hands-on approach Costco uses allows the company to limit supply chain restraints both from an inventory and cost standpoint. COST even goes so far as to visit any potential wine suppliers to ensure that the production, products, and suppliers themselves meet Costco's standards. There is no question that management has Costco moving in the right direction, although the company may need some time to grow in to the current valuation.
How to Play It: Costco's stock has reached a slightly overvalued level. I would wait for a short term pullback in the price of the stock before picking up the stock. Don't wait too long though, the company has solid fundamentals, an ever increasing revenue stream, and solid management moving forward. My personal 52-week price target: $123.00.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Always consult with your own registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.