Costco Earnings Preview: Superb Execution, Perennially Overvalued

| About: Costco Wholesale (COST)

Costco (NASDAQ:COST) the premier warehouse club retailer, reports their fiscal q2 '14 financial results before the opening bell on Thursday, March 6th.

Analyst consensus is expecting $1.17 in earnings per share (EPS) on $26.67 billion in revenue for expected year-over-year growth of 6% and 8% respectively.

It seems like analyst consensus is expecting 3% - 4% February '14 comp's for COST when results are reported Thursday morning, and many analysts have tempered expectations for the quarter, given the severe Midwest and East Coast weather.

COST put up a January '14 comp of 6.3%, which is truly phenomenal given the Midwest and East Coast weather issues. COST continues to trounce Sam's in the warehouse club space, and there really seems to be a market-share shift occurring towards COST and away from Sam's.

From a longer-term perspective, COST has been one of the premier retailers off the March, 2009 market lows, and off the 2008 Great Recession , putting up some of the best comp's in retail thanks to great brand offerings, the growth of the private-level Kirkland Brand, and superb execution. With Jim Sinegal's retirement, COST hasn't missed a beat.

Their capex has really ramped the last 3 - 4 years, with total capex climbing from 40% to over 60% of cash-flow, so COST management has really had the pedal to the metal in terms of store growth and square footage growth.

Despite this capex expansion, COST has managed to grow the dividend and issued a nice fat special dividend at the end of 2012. Currently COST is not buying back any stock and hasn't for a while, and has preferred to reward shareholders with the dividend.

All positives aside, our issue with the stock has always been one of overvaluation: even with the recent drop in COST from $125 per share in late November '13, to $115 today, COST is still trading at 24(x) expected 2014 EPS of $4.84 for expected 8% growth.

Even looking at cash-flow metrics, COST is trading at 16(x) operating cash-flow and 46(x) free-cash-flow.

In fact the only metric where COST looks reasonably-valued is price-to-sales, where COST is trading at 0.48(x) price to 4-quarter trailing revenue.

Technically, COST is perched right on its 50 and 200-day moving averages which have converged and on the weekly chart is sitting right on top of its 50-week moving average.

We would get interested in COST in the low $90's depending on what caused the shares to correct to that level. We remain long one low cost basis position in COST from April, 2005 at $40 per share.

From our internal spreadsheet here is COST's track record of EPS growth over the last 15 years and expected growth for the next 3 years:

EPS growth - estimated and actual
F/Y 2016 eps growth - estimated 11%
F/Y 2015 eps growth - estimated 12%
F/Y 2014 eps growth - estimated 8%
F/Y 2013 eps growth - actual 13%
F/Y 2012 eps growth - actual 20%
F/Y 2011 eps growth - actual 13%
F/Y 2010 eps growth - actual 14%
F/Y 2009 eps growth - actual -12%
F/Y 2008 eps growth - actual 10%
F/Y 2007 eps growth - actual 15%
F/Y 2006 eps growth - actual 10%
F/Y 2005 eps growth - actual 13%
F/Y 2004 eps growth - actual 22%
F/Y 2003 eps growth - actual 3%
F/Y 2002 eps growth - actual 15%
F/Y 2001 eps growth - actual -4%
F/Y 2000 eps growth - actual 14%
F/Y 1999 eps growth - actual 20%
Click to enlarge

Here is COST's track record of revenue growth over the last 14 years, and expected growth over the next 3 years:

2016 rev growth - estimated 7%
2015 rev growth - estimated 8%
2014 rev growth - estimated 8%
2013 revenue growth - actual 6%
2012 revenue growth - actual 11%
2011 revenue growth - actual 14%
2010 revenue growth - actual 9%
2009 revenue growth - actual -1%
2008 revenue growth - actual 7%
2007 revenue growth - actual 7%
2006 revenue growth - actual 14%
2005 revenue growth - actual 10%
2004 revenue growth - actual 14%
2003 revenue growth - actual 9%
2002 revenue growth - actual 14%
2001 revenue growth - actual 8%
2000 revenue growth - actual 15%
Click to enlarge

Morningstar puts an intrinsic value on COST of $115 per share, while our internal earnings-based intrinsic-value model puts a value of $140 on COST, showing that it still undervalued.

However, I prefer to wait at these levels. Like all great brands COST always trades rich. It requires patience and discipline to wait for a longer -- term pullback in a stock like COST, but we prefer to wait until the low $90's before considering adding a sizable position.

If you are a trader or hold trading positions, expectations are low coming into Thursday's report, and our own model has the shares about 18% undervalued.

Disclosure: I am long COST. 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.