So much for the earnings warning that Motley Fool Stock Advisor selection Costco
Costco doesn't give official guidance, but it will comment on whether the consensus analyst estimates are reasonable. Six weeks ago, Costco felt that one-time tax items and lower gross margins would result in earnings being about $0.06 to $0.09 below what analysts expected, but the company also mentioned that it might not be that bad and that there might be a one-time item to work in the company's favor.
At the time, only the negative one-time item was probable, and knowing this was the case, the company took the conservative route and commented on analyst estimates. The stock fell 4% on the news and was down 6% or more during the day. What ended up happening was that the income tax benefits did materialize to offset the one-time charge. And gross margins did decline slightly, but not by as much as the company initially expected.
Not entirely surprising, given the strength at Target
The most interesting part of the company's press release, however, had nothing to do with earnings, but was about option grants. If Costco's findings on its option grants were to be graded like a report card in school, I'd give the company an A- or a B+. The company didn't find any backdating as has been found at other companies such as UnitedHealth Group
That said, the company does need to have these transactions documented and know them cold, and it has committed to having a process in place in the future to do so.
Six weeks ago, at $46 to $47 a share, I felt Costco was becoming attractively priced, but all the good earnings news has Costco's shares back in investor's good graces and selling at $54 a share. That's a little bit below where I see Costco as fully valued, but I no longer consider the shares attractive enough to consider purchasing. Of course, the situation could change, because Costco's concern from six weeks ago about temporarily weak gross margins from declining sales of big ticket items such as HDTVs could still materialize. But for now, everybody's happy again.
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