Event: COST reports its fiscal Q4 earnings on Wednesday, Oct. 9th before the opening. The options market is implying about a 2.75% one day move, which is above both the 4 qtr avg of about 1.15% and the 8 qtr avg of about 1.35%.
Sentiment: Wall Street analysts are mixed on the stock, with 15 Buys, 15 Holds and 1 Sell, with an average 12 month price target of around $118. The stock has been very consistent, gaining 15-25% in 2010, 2011, 2012, and so far in 2013.
Options Open Interest: Open interest actually has more puts than calls outstanding (52k vs. 44k), a bit of a surprise given the strong stock performance over the past few years. Most of the open interest is concentrated in October and Jan14.
Price Action / Technicals: COST’s chart is the definition of an uptrend. Consistent Costco indeed, as all the major moving averages have been upward sloping since 2010, and the stock has only traded below its 200 day moving average for a few days since 2010. Quite an amazing run for a $50 billion market cap company.
In the short run, the $120 area has been resistant over the past few months. That is the all-time high, and the obvious level to watch on any rally from here. The 200 day moving average comes into play around $109, which is near the late August low as well. From a technical perspective, I would expect the 109-120 range to hold in the coming months.
Fundamentals: The healthy aspect of Costco’s stock rise over the past few years has been that it has mirrored the speed of earnings growth for the most part. Here are the figures:
| Annual Earnings Growth | Annual Stock Appreciation | ||
| 2010 | 19% | 19% | |
| 2011 | 12% | 14% | |
| 2012 | 22% | 15% | |
| 2013 (so far) | 11% | 13% |
The stock has appreciated in line with earnings over that period, so the stock’s move has mostly indicated a strong, growing business.
There are 2 main questions that potential owners of COST face today:
1) Is 25x P/E for 10-15% earnings growth cheap, fair, or expensive?
2) Will COST continue to earn 10-15% per year over the next few years?
Based on its execution history, COST’s answer to question 2) is likely yes, though a major economic hiccup in the U.S. would change that answer. But the answer to 1) is more difficult. My answer would be fair.
Volatility: Realized volatility in COST throughout 2013 has been very low. In fact, 30 day realized volatility has not moved above 20 for the entire year:
[caption id="attachment_31032" align="alignnone" width="600"]
30 day realized volatility (blue) vs. 30 day implied volatility (red) for COST, Courtesy of LiveVolPro[/caption]
The implied volatility is likely to fall back to around the 16-18 area after earnings. It would likely move lower if it were not for the higher vol backdrop in the broader market.
Trades: This is a company that rarely moves much on earnings, so we are unlikely to put on a new trade ahead of the event. But, as always, if we do, we’ll put up a new post detailing the trade.