Should You Buy Costco Stock After Its Earnings-Fueled Pullback?

Costco stock - Should You Buy Costco Stock After Its Earnings-Fueled Pullback?

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Costco (NASDAQ:COST) has been on fire this year and that may make it a tempting grab after Costco stock slipped on earnings. What’s the deal?

COST stock fell 65 basis points in Thursday’s trading session as the overall markets were hit hard. In fact, COST held up better than all three of the major U.S. stock indices. That’s no surprise, given that it has also outperformed them this year too. A month ago, shares were up 30% on the year, but they are now up “just” 20%.

Not helping matters is the 3.5% pullback post-earnings. Were the results bad?

Costco Earnings

Costco reported fourth-quarter earnings of $2.36 per share, which was in line with estimates. Revenue of $44.4 billion grew 5% year-over-year and beat estimates by $140 million. Some investors may find the in-line results uninspiring. However, Costco still has pretty impressive growth.

Earnings grew 13.5% YoY for the fourth quarter and 16.6% overall for the year, while revenue grew 9.7% for the year. That’s pretty darn good for a retailer these days. Comparable-store sales were a similar story, with fourth-quarter comps growing 10.8%, outpacing Costco’s 52-week comp-store sales growth of 9.4%.

In other words, comp-store sales are accelerating vs the full-year results. That’s great, especially as we head into the ever-important holiday season. While comps accelerated though, some could grow concerned over Costco’s online number. While e-commerce growth of 26.2% is great, it’s below the full-year result of 32.2%. I wouldn’t call this a red flag necessarily — considering that fiscal Q1 captures the holidays — but it is something to point out.

There was at least a yellow flag in the report, though.

“While the Company is still completing its assessment of the effectiveness of its internal control over financial reporting as of September 2, 2018, in its upcoming fiscal 2018 Annual Report on Form 10-K, it expects to report a material weakness in internal control.”

“The weakness relates to general information technology,” and so far, “I can tell you that there have been no misstatements identified in the financial statements as a result of the deficiencies,” CFO Richard Galanti said on the conference call.

This mostly seems like a non-issue, but it likely didn’t help with the post-earnings sentiment on Costco stock.

Trading Costco Stock

chart of Costco stock on earnings
Source: Chart courtesy of

So what do we do with Costco stock?

On Thursday before Costco reported, we published this Costco earnings outlook on InvestorPlace. We said to see how the $225 level holds up on a pullback, followed by the 100-day moving average near $218. On the upside, should COST stock reverse and move higher or rally after holding support either near $225 or the 100-day, look to see how it handles prior upside.

Specifically, look to see how it handles the underside of prior uptrend support (black line) near $237 and how it handles that short-term downtrend resistance mark (purple line) near $235.

Trading at 29 times this year’s earnings estimate isn’t cheap, even with the consistent expectations. Analysts expect Costco to grow sales 7% in 2019 and 2020 to go along with roughly 9% earnings growth in both years. But Costco stock has proven to be a stud, even as Amazon (NASDAQ:AMZN) and other e-commerce players continue to wreak havoc on most traditional retailer. Home Depot (NYSE:HD) is another one that can hold its ground.

Even with the recent IPO of BJ Wholesale Club (NYSE:BJ), COST stock still continues to do well. I wouldn’t bet against Costco stock unless it starts to break down on the charts. So far, we’re not seeing that

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.

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