Costco's Future

If ever rain was sent from the heavens for the benefit of mankind, it was on Sunday, when it washed out baseball in Boston. Granted, we talk a lot of sports here at the Final Take and, yes, sometimes we feel a wee bit guilty... but this war between Boston and New York is just too much.

You probably heard about the fisticuffs, but did you also hear that New York Mayor Michael Bloomberg said Red Sox pitcher Pedro Martinez would have been arrested for his behavior during the fourth-inning brawl had it occurred in New York? Our managing editor, Bob Bobala, is from Massachusetts, so it sounds to us like there was blame to go around. Either way, who likes the odds of Mr. Martinez getting a fair trial?

Stay tuned for earnings season on Wall Street.

In today's Motley Fool Take:

Costco's Future

Most stories about warehouse club leader Costco's (Nasdaq: COST)quarterly report address its ability to beat the lowered earnings forecast issued in August. Investors, though, should be looking for signs that the company can regain its previous margins.

Costco, which has taken a stand on the cost of the California worker's compensation system, added $43 million to reserves last year ($0.06 a share) to cover these expenses. This latest report was tailor-made for Costco to signal either its satisfaction with the new law California's legislature approved or its hopes that the new governor will do more after the law takes effect in January. But all the company said was, "We don't know the impact."

Management did leave the impression that, because of conservative reserving, we might see a positive impact when actual costs are finally known. The California Insurance Commissioner forecast a 20% to 30% decrease in the cost of worker's compensation claims. A 12% rate increase scheduled for January should be eliminated, and there is talk of a 7% rollback in rates already in effect. The combination should be positive for Costco's margins.

Where else are margin improvements likely to come from? Health-care costs have been increasing at twice the rate of sales. Although Costco has not raised employee health-care contribution rates for eight years, it will raise them gradually for full-time employees from 4.5% to 8% of total cost by 2007. Even at that rate, Costco will still provide benefits at better than the industry's 20% to 30% rate.

The latest earnings webcast is revealing. Costco is clearly proud to be paying the industry's highest hourly starting wage of $10 to attract the best people. They are focused on quality and profitability -- and on Wal-Mart's(NYSE: WMT) Sam's Club stores. The company is trying hard to be a place where people want to shop, and trying just as hard to keep margins up.

The earning forecast for 2004 is $1.67. If margins are going to be affected by worker's compensation, the first signs of improvement will not show before the second quarter, when actuaries can measure any effect. Nevertheless, the conference call makes it clear that Costco is focused on improving margins. Based on the changes being made, the earnings estimate for 2004 looks very light.

Costco was Tom Gardner's pick for Motley Fool Stock Advisor in May 2002.

Quote of Note

"My mother said to me, 'If you become a soldier, you'll be a general; if you become a monk, you'll end up as the pope.' Instead, I became a painter and wound up as Picasso." -- Pablo Picasso

Not Earnings Season!

The market's been humming along nicely for the last few quarters. Now it's nail-biting time, as many of the country's biggest names try to justify those stock gains with September quarter results.

Microsoft(Nasdaq: MSFT) and Intel(Nasdaq: INTC) report this week. Other huge tech names like Apple(Nasdaq: AAPL), IBM(NYSE: IBM) and EMC(NYSE: EMC) will also reveal their quarterly financials.

You've got enough bellwethers here to start your own symphonic flock, though they're guiding different herds. While Microsoft and Intel will shed some light on the state of the computer industry, Apple may prove to be a better gauge of how online music is faring. IBM? Corporate services, baby, while EMC lets us know if companies are starting to spend on information technology again.

But don't have a one-tech mind. From Caterpillar(NYSE: CAT) to Coke(NYSE: KO), we'll learn about agriculture and pop culture. Hershey(NYSE: HSY) and Mattel(NYSE: MAT) should answer those questions lurking in the back of your mind about chocolate bars and Barbie dolls.

By week's end, you will have literally hundreds of companies posting their latest results. Yes, earnings season is a deluge of numbers, new optimism, and shattered promises. But with so many important companies set to announce their financials, some will leave a mark on the market's direction. You can hope for the best, sure, but due diligence will go a long way to keeping your fingernails intact.

Discussion Board of the Day: Microsoft

How do you think Microsoft will make out when it reports on Thursday? Do you think it was right to initiate a dividend policy earlier this year? All this and more -- in the Microsoft discussion board. Only on Fool.com.

Not yet a member of the Fool Community? Jump into our discussion boards free for 30 days!

Mandalay Execs Sell Out

Since March 2002, in a blinding flurry of insider sales, Mandalay Resort Group(NYSE: MBG) CEO and Chairman Michael Ensign and Vice Chairman Bill Richardson have dumped more than $600 million worth of stock. Over the past several weeks, both Ensign and Richardson have been selling what is effectively the last of their MBG holdings on a daily basis, with no explanation whatsoever.

Some have speculated that the two are on their way out. According to the Las Vegas Review-Journal, "Ensign and Richardson had told friends in the gaming industry that they did not want to die owning a casino company." Yet Mandalay insists that they're not going anywhere.

But if it's not an exit strategy, then what is it?

It's not diversification. As of last Wednesday's sale, Bill Richardson owned 400,900 shares, or about $16 million. Michael Ensign had a token 25,000 shares, or less than $1 million in stock left. He's probably got less than that today. That means each alone has about $300 million invested elsewhere, and I'm sure their investment portfolios consist of more than just a nice car and a house.

And it's not purely valuation, either. It can't be, because Ensign and Richardson now hold virtually nothing.

The timing is curious, as the Las Vegas Strip -- which accounts for most of the company's profits -- is just beginning to pick up steam. To trump competitors MGM Mirage(NYSE: MGG) and Park Place(NYSE: PPE), the company has invested heavily in its flagship Mandalay Bay, with a new convention center and a promising mall project leaving some investors foaming at the mouth.

Except the stock's not worth drooling over, especially in the absence of a reasonable explanation over the sales.

At 8.8 times trailing EBITDA, the stock looks fully priced. And aside from its South Strip gems -- Mandalay Bay, Luxor, and Excalibur -- Mandalay owns substandard properties in Circus Circus and Slots-A-Fun towards the north side of the Strip. Meanwhile, its other Nevada properties are being pinched by tribal gaming in California.

In Illinois, its jointly owned Grand Victoria boat is at the mercy of an ill-conceived tax plan, and its beautiful Gold Strike property in Tunica, Miss., faces stiff competition.

The company's financing activities are also questionable. Rather than reduce its $3 billion debt, Mandalay has used its cash to repurchase shares and pay an unnecessary dividend. At the same time, it used a convertible bond offering to refinance debt, investing 10% of its outstanding share count in exchange.

How can you pay a $60 million cash dividend when you're issuing stock to refinance debt? Why the insider sales?

Why even worry? It can't be a good sign when your top two executives sell all of their shares, and the stock isn't lucrative enough to warrant a second thought. Just cash in your chips and look elsewhere.

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And Finally...

Today on Fool.com: eBay is fast approaching the goals it set three years ago.... Enigmatic ImClone: What do you make of this crazy company anyway?... Even minor injuries can be a major blow to your paycheck without the right disability coverage. Click here for The Price of Pain.... Russian Gas, U.S. Profits: A rock-solid ConocoPhillips looks to bring Russian natural gas to the U.S.

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