Wall Street is cheering the latest earnings report from Costco Wholesale Corporation (NASDAQ: COST), with the shares adding more than 3% within the first hour of trading. This morning, as Tom Johansmeyer reported, the wholesale club reported a 6% slide in fiscal fourth-quarter earnings, but the results nevertheless exceeded analysts' expectations.
In the wake of COST's report, analyst Brian Sozzi of Wall Street Strategies reiterated his Buy rating and $66 price target on the equity. "In our view, 4Q09 will go a long way in supporting a higher valuation for Costco," wrote Sozzi in a research note this morning. "The company has managed to control costs, drive traffic to its warehouses consistently throughout the economic downturn, paid $300 million in annual dividends in FY09 (payout ratio of 26.0% second to only Wal-Mart in the sector), and has catalysts on the horizon to showcase earnings power above currently modeled for consensus EPS."
From a technical perspective, today's earnings surprise has propelled COST through short-term pressure in the $59 region. It seems likely that some short sellers were forced out of their bearish bets by the stronger-than-expected earnings report. Short interest on the retailer surged by nearly 10% during the past month, and now accounts for a respectable 4.1% of the equity's available float.
Meanwhile, in the options pits, it looks as though some traders are adding new long calls today. COST's October 60 call has seen about 7,100 contracts change hands on open interest of 12,902, with one large block of 1,749 contracts trading near the ask price of $1.05 -- suggesting they were bought.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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