Thursday, March 5, 2020

Why Investors Love Costco Shares Amid Virus Fears

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What’s happening: Costco Wholesale is scheduled to report its second-quarter results after the closing bell on Thursday, March 4.

What happened: Costco has topped earnings estimates in the past couple of quarters and expectations are for the company to deliver another beat. Investor sentiment is hugely positive for this stock, given its strong performance versus closest competitors.

Since the company’s second quarter is from December through February, it will include the impact of both holiday sales and the coronavirus outbreak. Costco had a good holiday season and expectations are for the company to have benefited from the coronavirus as well.

  • The consensus revenue estimate stands at $38.22 billion, representing 8.0% year-over-year growth.
  • The estimate for earnings is $2.06 per share, with 2.5% growth from the same quarter in the previous year.

Why it matters: The Washington-based retailer has significantly increased its market share in the recent period. Considering the last four reported quarters, Costco generated sales of over $150 billion, which is more than double of its two closest competitors (Walmart and BJ’s Wholesale Club) taken together.

Costco opened 20 stores in fiscal 2019 and CFO Richard Galanti said the company plans to open “another 20-ish” this year.

The company’s robust sales and profit growth have been driven by a rise in its subscriber base, despite an increase in annual membership charges. The warehouse club chain, which offers products at very discounted rates, has seen remarkably high retention rates for its members.

Shoppers are now flocking to the warehouse club chain across the country to stock up on groceries, household goods and other items, after a rise in coronavirus cases in the US. This panic buying is expected to continue to boost Costco’s sales.

While other retailers are fearing a period of economic slowdown caused by the virus outbreak, Costco is well positioned, as more consumers look for discounted stores during a financial downturn.

Costco has already indicated strong sales for both January and February, with 9% growth in December shopping. Analysts expect Costco to report traffic growth of at least 3% for the fiscal second quarter, even as Walmart and Target have both reported weakness.

The company is planning to invest heavily in expanding its stores globally and management has projected capital expenditure of $3 billion in fiscal 2020. The forecast includes outlays for improving ecommerce capabilities, focusing on home deliveries of grocery products across the US.

How the shares have performed so far: Costco’s stock gained more than 40% in 2019 and has spiked 8% year to date. Despite this, investor sentiment remains positive, and shares could rally further. Costco’s stock typically becomes volatile just before and after the company reports results, which could be the case this time, as some traders may view the recent share rally as an attractive profit taking opportunity.

What to watch: Costco is under huge pressure to beat estimates this quarter. The retailer is expected to report strong results and investors will focus on its membership metrics, as subscription fees contributes significantly to the company’s earnings. Investors also await more details from management around plans to develop a nationwide delivery network.

The Markets Today

     

Investors will be watching European stocks today, with markets expecting the central banks of major economies to announce steps for easing the coronavirus impact.

Context: European shares continued their upward momentum from Tuesday and closed higher on Wednesday. The US Federal Reserve’s emergency rate cut decision lifted hopes of further action from other major central banks. However, travel-related shares bucked the market trend and posted a decline of around 2%.

Details: European markets witnessed a rally on Wednesday after the Fed lowered interest rates by 50 basis points. The rate cut, which was announced after the G7 meeting, was made to combat the impact of the coronavirus outbreak on the US economy.

The European Stoxx 600 surged 1.36% on Wednesday, with stocks of utilities leading the rise. The Stoxx 600 index has gained 2.7% so far this week, after having declined by 12.7% last week, its worst weekly performance since 2008. The German 30 rose 1.2%, while the CAC 40 was up 1.3%.

The World Bank announced plans to provide $12 billion in support to countries to fight the COVID-19 outbreak. China has continued to report a lower number of new confirmed cases, while those outside the Chinese borders have continued to rise, including in countries like the US, South Korea and Italy.

British money markets expect the Bank of England to reduce interest rates by 25 basis points at its upcoming meeting scheduled for March 26.

In corporate news, shares of Eurofins Scientific climbed 5%, after the company reported full-year results for 2019 and issued encouraging guidance. HelloFresh’s shares jumped over 8%, amid coronavirus fears.

On the economic data front, the Eurozone’s final composite PMI came in unchanged at 51.6 for February.

Why it matters: After a strong performance in yesterday’s session, all eyes are on the couple of economic reports from European countries scheduled for release today. This includes Germany’s Construction PMI and Spain's consumer confidence. Strong data readings are likely to lift the market sentiment further.

What to watch: Investors await announcements by central banks to help ease coronavirus fears. The IHS Markit German construction PMI surged to 54.9 in January, while Spain's consumer confidence climbed to 87.2 in January.

Other Markets: Most European indices closed higher on Wednesday, with the FTSE 100, German 30 and French 40 up 1.45%, 1.19% and 1.33%, respectively.

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What else to watch today

     

South Africa’s current account, SACCI business confidence index, Mexico’s consumer confidence, Brazil car production and new vehicle registrations, UK’s new car registrations as well as the US NFP (nonfarm payroll) report, initial jobless claims and change in natural gas stocks.