Too Early To Dump Costco On One-Off Events

NORTH BRUNSWICK TOWNSHIP, NJ, UNITED STATES - 2018/08/14: Costco Wholesale store in North Brunswick Township, New Jersey. (Photo by Michael Brochstein/SOPA Images/LightRocket via Getty Images)

Costco Wholesale Corporation (NASDAQ: COST) has seen its forward P/E multiple decline from 28.3x from mid-November 2018 to 27.3x as of January 17, 2019, with the company’s gross margins narrowing to ~10.7% in FY19’Q1, its lowest since FY14.

While the application of current forward P/E ratio to the FY19E diluted EPS forecast of USD7.42 results in a price target of ~USD202.0 with a downside of ~4.4%, the adjusted trailing-twelve months (TTM) P/E ratio of ~31.3x yields a stock worth USD231.9 with an upside of 9.7%.

Meanwhile, a DCF valuation, assuming ~5.0% WACC and trailing EV/EBITDA ratio of 13.0x for terminal value calculation, results in a fair value of ~USD245.8, where the upside amounts to ~16.2%.

Against this backdrop where there are twice as many earnings downgrades as upgrades over the past four weeks by Wall Street Analysts for FY19E earnings, , this article explores why it’s too early for COST’s investors to dump the stock which has declined by ~6.6%, (cf. 0.6% decline of S&P 500) since its latest earnings release in December.

Click here to read the full article on Seeking Alpha.

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