Why does a stock go up when it's supposed to go down? How about because the company behind it has "value and trust."
Last week something I live for, the split between a stock and the analysts occurred when Costco (COST) reported a so-called weaker-than-expected quarter and it dropped almost 5% in pre-market trading.
Having read the conference call the night before I knew that the headlines were wrong and the stock had to be bought. You've made about a quick 10 points if you bought the panic and I don't think the move is done.
So, what happened?
When Costco reported the headline numbers were indeed right. The problem for anyone who covers Costco knows that there are so many moving parts that the headline numbers mean next to nothing. Sure if the same store sales were forecast to be 7% and they come in at 5%, as was the case, then all bets are off. But if the same store sales are in-line as they were Thursday, you have to digest the quarter and then see what the analysts are going to say about it.
Why did I know to tell you to buy it? Simple: the analysts roundly approved of the quarter and many raised their price targets even as the headlines would have suggested that they should have been cut.
What did the headlines not capture? First, the company had record sign-ups with total cardholders now at 98.5 million up from 97.2 million last quarter. Second, renewal rates in this country are insanely high, and going higher from 90.7% to 90.9% in this quarter.
E-Commerce, long an afterthought at this company, is now growing at 19.8% and getting stronger.
Finally, the company opened a store in China and it was mobbed. There were so many people that, as Richard Galanti, the no nonsense CFO and executive vice president who runs the call said, "due to overwhelming crowds it was actually closed about four hours in on the opening day. The store racked up 200,000 members in a few weeks' time, an unheard of pace, as other new stores would typically have about a third of that in a roughly comparable period.
Is it all good?
No, not with these analysts, which is why there is so much confusion between the reported numbers and the stock. So let's dive in and parse not the stock, but the analyst process and why it is so flawed.
First let's define the job of the average analyst. She wants to be able to come up with a model that allows her to figure out what the company can earn. She then wants to see if the numbers that get inputted are better or worse than her model. If the numbers are better and the forecast is raised than she can typically raise her price target and re-recommend using the new numbers.
Of course, the opposite is true, too. Those who were selling on Thursday night were selling in anticipation that numbers have to come down and given the stock trades at a very elevated level, 35 times earnings versus 19 for the S&P, it's logical to expect some downgrades. You don't get that high a PE and still expect a stock to stay up 44% for the year if you blow the quarter.
There's only one problem. Costco is like no other company I have ever seen. It is not going to run the company to please Wall Street. It is going to run the company to please consumers and if the consumer is happy, Costco is happy. Oddly, these analysts don't get that one of the best performers of all time has refused to play the game for years now because it refuses to help them model.
Most companies are willing to guide up in a very proscribed way. Not Costco. Repeatedly the analysts ask for help on margins in gasoline - Costco is a huge seller of gasoline - or on tariffs or on membership cards. They want to know if tariffs are creating a disadvantage. Galanti only says that there will be "some impact", nothing more. How about big ticket tariffs? Given that Costco only sells 3800 items versus some chains that sell 50,000 or 100,000 or even 150,000, Galanti says he thinks the tariffs are easier to manage. He gives a not so the new cheese and olive oil tariffs from Europe but he won't put a number on it. Anyway, Galanti explains, "I think we are able to decide not to sell something and put something else in its place." Obviously, again, it is easier for Costco to do so then to other chains that have so many different items. Galanti knew everyone was focused on tariffs. But he, wisely, talked about something they had been possessed by before, the rising cost of freight, and he pointed out that it's peaked and gone back down, something the analysts didn't' seem to be interested in at all this time around.
More important, despite the throngs signing up for a Costco in China, the company doesn't have any plans to open another one until 2021 because it is "pretty methodical" about openings. This slow pace drove the analysts up a wall with one of them asking if expectations were really exceeded given the slow pace. Galanti then says that the opening "clearly surpasses all of our very high expectations", but that doesn't mean they are going to start throwing them up before they are ready.
How much did these analysts want instant Costcos in all cities so they could proclaim that it is worth it to stick with the story because of the acceleration in growth coming.
Nope. Not going to get it. Unlike most retailers, Costco's not going to expand until it gets it right for customers, not for Wall Street. I am sure the company was NOT happy that it had to close the first day after being open for a handful of hours. It's now operating smoothly.
How about the mood of the consumer? Other companies, when reacting to this, try to gauge precisely how the consumer's treading. Galanti? He will have nothing of it: "I think (if) we all turned off the television and stopped listening to everything every day we'll all be better."
In the end the analysts are bound to fail you because they don't get the metaphorical success here that's embodied by the $200,000 diamond that the company sold this quarter. "We're selling close to $200,000 carats of diamonds," Galanti says, "that's a lot of carats." For the analysts it might as well be carrots. But that, plus the crowds, the membership re-ups are all about "value and trust."
Yep, value and trust, the most important values a retailer can offer the most important values any company can offer.
