At Some Point Costco Corp. Becomes a Value Play


We all love Costco Wholesale Corporation (NASDAQ:COST) but as investors, we are struggling to get behind any company, so can this retail giant get the support from Wall Street and finally move shares higher?

In the past 6 months, Costco shares have gone from $74 to today's value of $49, that works out to be a 30% decline.

However, Costco is still paying a 16 Cent dividend, thanks to shares falling below $50, the dividend yield is now at 1.31%.

The P/E is down to 16.9 and despite the glum outlook for 2009 and beyond for U.S. retailers, Costco may be undervalued based on low expectations.

That's the best thing Costco has going for them right now, expectations are so low that if they do manage to out perform the analysts, shares will increase and you still get the dividend (provided they don't cut it anytime soon).

Last month, Costco Wholesale Corp. said they do not expect to meet analysts' projections for the second quarter of 2009 and said fiscal 2009 predictions look too high as well.

The Company said earnings were hit by a charge of $0.05 cents a share for accounting adjustments on life-insurance contracts which, if backed out, indicates the Company topped projections for an operating profit of $0.62 a share.

According to Reuters Estimates, analysts on an average are expecting the Company to report EPS of $0.75 for the second quarter of 2009; EPS of $3.01 for fiscal 2009. 

Costco just reported that for December, same-store sales fell 4%, and total sales fell 2% from the year-earlier month. Among their merchandising divisions, foods -- frozen, cooler and deli were strong, while non-foods were weak.

But forget what I think, let's review the recent analyst take for Costco:

12-Dec-08 Reiterated McAdams Wright Ragen Hold $65 → $55
12-Dec-08 Reiterated Deutsche Securities Hold $62 → $54
09-Dec-08 Reiterated Jefferies & Co Hold $52.50 → $50.50
08-Dec-08 Reiterated Barclays Capital Equal Weight $70 → $64
05-Dec-08 Reiterated UBS Neutral $62 → $57

Price target reductions are the common theme, but the ratings remain intact. 

On Jan 5th, Piper Jaffray previewed Costco's (NASDAQ: COST) December Comps. The firm maintains their Neutral rating and $48 price target.

The firm said, "We are maintaining our December comp estimate of -4%, in line with consensus. Our estimate assumes core merchandising comps will be in the 3-4% range, which is similar to trends in October and November but a deceleration from Apr-Sept trends of >+5%. Despite the slowdown in core merchandise comps, COST continues to post impressive results relative to other retailers principally driven by food and gas sales."

Piper Jaffray continues to be concerned about expense deleverage due to weaker sales trends. For Q2-Q4, the firm currently expects deleverage to range from 35-40 bps.

Costco Wholesale Corporation operates membership warehouses, which offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities.

These days you have to buy and pick a stock with a story you can believe in, and more importantly, that Wall Street can endorse.

One thing you can look at is Costco's short interest is decreasing, here are the latest numbers:

Costco Wholesale Corp. $

Short Interest (Shares Short) 18,084,500
Days To Cover (Short Interest Ratio) 6.0
Short Percent of Float 4.23 %
Short Interest - Prior 19,598,400
Short % Increase / Decrease -7.72 %
Short Squeeze Ranking™ -7


At some point, Costco will become a value play, the question is when?

How much lower can COST shares go, will we see a new 52-week low, it only has to drop $6 more for that to happen?

If Costco shares to creep below $44, will Wall Street call COST shares a value play?  Time will tell, but the time to act is before everyone else gets on the Costco Train and with valuations looking better and better, that entry point could be soon.





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