$COST Fiscal Q2 Earnings Preview

by Dan March 11, 2013 2:19 pm • Commentary

Event:  COST reports fiscal Q2 earnings tomorrow morning prior to the opening and will host their conference call at 11am.  The options market is implying about a 2.8% move vs the 4 qtr avg of about 1.2% and the 8 qtr avg of about 1.55%

Sentiment:  Wall Street analysts remain slightly Bullish on the stock with 16 Buys, 11 Holds and 1 Sell with and avg 12 month price target of $106 or about 3% higher than current levels.  Short interest sits at less than 2% of the float.  

Option Volume / Open Interest:  Today’s volume as expected is concentrated at the 2 near the money strikes with 2250 of the March 105 calls and 1300 of the March 100 puts traded as of 1:30pm.   Total open interest is mildly skewed towards puts with the largest lines being the March 100 puts with 7k, and the March 97.50 Puts with 4k.  The largest open interest in the calls is the March 105 calls with 4k and the April 103 calls with 3k.

Vol Snapshot:  Considering the VIX is trading at levels not seen since early 2007, IV on COST is fairly elevated into earnings and could see a drop to the mid to low teens following tomorrow mornings results.

[caption id="attachment_23498" align="aligncenter" width="589"]COST 30 day IV vs 30 Realized IV from Bloomberg COST 30 day IV vs 30 Realized IV from Bloomberg[/caption]

Price Action / Technicals:   COST has under-performed the broad market ytd, up a tad less than 4%, but adding back the 7.00 special dividend the company paid in early December, the stock would be trading at all time highs.

The 2 year chart below shows how it has held the well defined uptrend from the 2011 lows and continues to make higher highs and higher lows.  The stock could very well be range bound as it would like take a significant beat and raise to cause the stock to make new all time highs in the near future.  Could the chart be making the dreaded head and shoulders top with $95 as the neckline.  If this were the case I would expect $95 to serve as considerable support, but could be a level for both bulls and bears to shoot against over time in the event of an earnings disappointment.

[caption id="attachment_23506" align="aligncenter" width="589"]COST 2 Yr chart from Bloomberg COST 2 Yr chart from Bloomberg[/caption]


Valuation / Fundamentals:  COST is not a cheap stock relative to some of its big box and discount retailer peers, trading at ~22.5x fiscal 2013 earnings and sales that are expected to grow 16% and 7% respectively vs WMT at 13.5x 2013 expected growth of 7% and 5% respectively.  Obviously you are getting more bang for your growth buck but COST PE now sits near 10 year highs (below) and it would take a considerable uptick in earnings for COST to grow into this multiple.

[caption id="attachment_23507" align="aligncenter" width="589"]COST 10 Year PE from Bloomberg COST 10 Year PE from Bloomberg[/caption]


MY VIEW:  I took a shot with a short biased trade back on Feb 1st after the infamous WMT “sales disaster” email, and covered on the first sell off for a gain (read here).  With WMT and TGT reporting results and guidance in the last few weeks that were not as bad as some had feared with the headwind of increased payroll tax, and sequester, the fix appears to be in as it relates to consumer oriented names and the broad market as a whole.  The stocks go up on good news and sideways on bad news.  This past Thursday, COST reported same store sales that were better than expected for Feb (6% vs 4.8% estimate) but sales likely light vs consensus and the stock trades higher.  Obviously I think committing new capital to equities up here is nuts, but for the time being I am not in the camp to attempt to pick tops.

If I were to play I would likely be more inclined to fade the move, as I think anything north of 3% would be fairly uncharacteristic.