Event: Costco (COST) reports their fiscal Q3 results tonight after the close. The options market is implying about a 2.3% one day move which is a tad rich to the 4 qtr avg move of about 1.9%.
Sentiment: Wall Street analysts remain fairly positive on the stock with 20 Buy ratings, 12 Holds and only 1 Sell with an average 12 month price target of $155, or about 8.5% higher than current levels.
Price Action / Technicals: COST is up about 5% so far in 2015, about 8% from the all time highs made in early February, days prior to the company paying a $5 special dividend.
The 1 year chart below shows fairly obvious near term technical resistance at $150, and support at $140, just above the stock’s rising 200 day moving average:[caption id="attachment_53970" align="aligncenter" width="600"] COST 1yr chart from Bloomberg[/caption]
Fundamentals / Valuation: The company issued two consecutive same store sales misses in April and March as result of the strength of the dollar and lower gas prices. In April, the comp was flat year over year, ex gas and constant currency up 7%. Year to date the company stated in early May that same store sales were up 2% (4% in the US and down 2% internationally). COST gets 70% of their sales from the U.S., and the strength of the dollar has clearly taken its toll. The U.S. is obviously humming for COST, and the impact of lower gas sales appears to being offset by greater spending in stores.
I guess the hangup for COST is valuation, the stock is trading 27.5x 2015 earnings that are expected to grow 13%, on 5% sales growth.
MY VIEW: Aside from valuation there are few holes in this story. The company is executing very well in a very competitive retail environment in the U.S. which is offsetting what appears to be fairly significant headwinds over seas and resulting from oil’s decline.
As for trading, short dated options look dollar cheap, for good reason, the stock generally does not move on earnings. For instance, with the stock at $144.60, the May 29th weekly 145 calls are offered at 1.45, or about 1% of the underlying stock price! If you were long and worried about a negative reaction similar to that of WMT last week, stock replacement could be viewed as a very attractive strategy. On the flip-side, for those looking to make a directional bearish bet, the May 29th weekly 144 puts offered at 1.40 look equally cheap. The important point here is that unless you get some big surprise from May comps (which have yet to be reported) and weak forward guidance, the stock is not likely to move a whole heck of a lot lower this week. Better than expected Q3 results with upside guidance probably is rewarded with a slightly greater than expected move to the upside, but hard-pressed to see the stock above $150 under most scenarios.
It’s possible this could be a stock that we’d want to add to the selling the event move strategy, but weeklies just look too dollar cheap to bother. June could make sense at about 18-19 vol which is likely to be below 14 following the event. We’ll look at that today and post on the site if anything catches our fancy.