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Costco (NASDAQ:COST) reports their fiscal Q4 '12 financial results before the bell on Wednesday, October 10, 2012, with analyst consensus looking for earnings per share of $1.31 on $31.69 billion of revenues for expected year-over-year growth of 31% and 12% respectively, which is pretty good growth for the big-box retailer.

Over the last 3 months, COST's revenues and EPS estimates for Q4 '12 have trended slightly higher. Analysts are looking for a 5% quarterly comp from COST in fiscal Q4 '12, identical to last quarter's comp. The September comp just reported last week was 6% total, and 5% if we exclude gas and f/x. The stock has been a monster this year, up 22% as of Friday's close, versus the 16% approximate return for the S&P 500.

Our issue with COST, since we have been out of the stock since the mid $80's and have missed a 15% - 20% move, is primarily valuation: today, at $102 per share, COST is trading at 22(x) 2012's expected EPS of $3.87 with 17% growth expected this year and 15% and 11% over the next two years.

COST's cash-flow valuation isn't too pricey at 12(x) enterprise value to cash-flow, but since we've followed COST from the mid-1990's, one thing I've learned is that given their razor thin margins, there is little room for error operationally, which can result in big changes in the stock price.

COST operates with a 2.5% - 3% operating margin and a 1.5% - 2% net margin. In the early 1990's with gas and even workmen's comp expenses, the stock would get hit sharply on small changes in the income statement, thanks to the margins.

The other issue is that Jim Sinegal is now gone, the founder and CEO, and his successor is in place. Although we don't expect too many changes cosmetically, the fact is when a founding executive departs, it can set off changes internally, which can have a big impact.

Finally, "quality of earnings" have been an issue the last few quarters, as non-operating items have boosted earnings per share and overstated the growth rate. Last quarter, a lower tax rate and interest income added $0.04 to what was a $0.01 penny beat, and the quarter before that, a lower tax rate accounted for the entire EPS upside surprise.

We've missed a 20% move in the stock the last three months, and although I'm not happy about it, we feel comfortable waiting for a more lengthy pullback in the stock. Still, this chart look great, and the fact is COST is a first-class operator, it is just that we want a lower-risk entry point to be a bigger buyer.

We are long one COST position in a long-term tax adverse account from April '05 with a $40 cost basis.


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Source: Costco Earnings Preview: Still Waiting On A Lower-Risk Entry Point