Thursday, December 11, 2008

Costco (NASDAQ:COST): Morgan Stanley and JP Morgan expect COST to guide down

Two tier-1 firms are very negative on Costco (NASDAQ:COST) ahead of today's call:

- Morgan Stanley expects management to be extremely cautious on the outlook for the rest of the year and for the stock to come under pressure throughout the day.

What to Watch For on the Call: We expect management to lower both 2Q (MS $0.71 vs. street at $0.75) and full year guidance on the call (MS $2.97 vs. Street at $3.01). As current US core comps are running below our 3% estimate for the rest of the year, we believe there is risk the company can guide below our current estimates.

- JP Morgan: Looking To The Call For Revised Guidance. As previewed, we think that the market widely anticipated a 1Q beat (relative to consensus estimates) and we wouldn't be surprised to see the stock open modestly higher. However, we believe that the real news of the day will come on the company’s 11:00 AM EST conference call (dial in # 1.800.399.8203) when details of the beat (i.e., how much of the upside came from unusually rich gas margins vs. core merchandising strength) are revealed and the significance of the quarterly trend is framed vis-à-vis updated FY09 guidance (currently @ $3.00-$3.25, Street @ $3.01). With this in mind, we believe that the prior outlook may prove too optimistic with risk that the company will either trim its full-year EPS guidance – resulting in a potential mid-day shift in the stock toward the downside.

At 17.3x our CY09 EPS the stock looks priced for perfection, if not a bit over-valued given slowing core comp trends, which could lead to significant SG&A deleverage down the road. Stay Neutral.

Notablecalls: As JPM notes the stock is still priced to perfection and a guidance cut will cause the stock to trade down. Looks like COST isn't the safe heaven many believed it to be.

My bet is a 5-7% downside is in the cards today.

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