Foolish Forecast: Costco Keeps Climbing

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Costco Wholesale (Nasdaq: COST) reports second-quarter results on Wednesday morning. Find out how the warehouse wizard fared in the first quarter, then come back (please!) for a fresh look at the competitive landscape.

What Fools say:
|Here's how Costco's CAPS rating stacks up against some of its peers and competitors:

	Market Cap (Millions)	Trailing P/E Ratio	CAPS Rating
Wal-Mart Stores (NYSE: WMT)	$198,598	15.7	***
Target (NYSE: TGT)	$43,072	15.7	***
Costco	$26,920	24.3	****
Sears Holdings (Nasdaq: SHLD)	$13,161	11.8	**
BJ's Wholesale Club (NYSE: BJ)	$2,023	20.8	**

Data taken from Motley Fool CAPS on 3/3/08.

Out of the large warehouse clubs and discount store retailers, Costco is the only one to score an above-average four CAPS stars. Why?

Looking at the comments from CAPS players who are bullish on the stock, it seems that Costco simply is the best of breed. "Warehouse leader," says one Fool. "Best retailer," says another. Wolfhounds sums it all up: "The ultimate retailer in bad times, and the best run company in the big box space."

Even the bearish comments tend to start with "I love this company." It's the stock price they don't like; just have a glance at the price-to-earnings ratios above.

What management does:
The margins are rather stable, by necessity. There isn't much room for massive clearance sales or extravagant administrative expenses when you're running as close to the breakeven mark as Costco does. The numbers need to be predictable and safe. While revenue growth has come down a bit, it has still averaged 10.3% annually over the past three years, and analysts are predicting an 11.4% increase in the upcoming earnings release.

Margins	9/06	11/06	2/07	5/07	9/07	11/07
Gross	12.3%	12.3%	12.3%	12.2%	12.3%	12.4%
Operating	2.7%	2.7%	2.6%	2.5%	2.5%	2.5%
Net	1.8%	1.8%	1.7%	1.7%	1.7%	1.7%
FCF/Revenue	1%	1.2%	0.4%	1.3%	1.1%	0.8%

Y-O-Y Growth	9/06	11/06	2/07	5/07	9/07	11/07
Revenue	13.6%	13%	12.1%	11.9%	7.1%	7.6%
Earnings	3.8%	3.5%	0.1%	(3.3%)	(1.9%)	(1.5%)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Yes, Costco is a pricey stock today, judging by the P/E ratio. But the shares are also worth 0.4 times trailing revenue (Wal-Mart: 0.5; Target: 0.7). And the venerable "BMW Method" tells me that Costco's stock is very fairly priced today. Not a screaming buy, but not terribly expensive, either. If you can live with fairly predictable 13% annual growth plus a 0.9% dividend yield, Costco may be your stock.

As for the quarterly report at hand, you should expect decent results. When consumer spending goes down in general, you'll find short lines and low sales at midmarket stores such as Target or J.C. Penney (NYSE: JCP). Low-cost retailers such as Costco that appeal to upscale shoppers and penny-pinching consumers reap the rewards. What's more, the company has missed Wall Street's quarterly earnings estimates only three times in the past five years, and the current consensus sets the bar at 12% earnings growth over last year.

Further fine Foolishness:

• Dueling Fools: Costco
• Conservative Costco Adjusts to Reality
• Digging Those Discounters