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Market Preview: A Good Bad Sign

As for Wednesday's scheduled news, the earnings calendar is pretty light with Costco Wholesale (COST), Progressive Corp. (PGR), and Ruby Tuesday (RT) among the few notables.

Costco gets the spotlight treatment here. Shares of the Issaquah, Wash.-based warehouse retailer are up more than 20% so far in 2012, hitting a 52-week high of $103.51 on Sept. 21. The move has pushed the valuation into elevated territory vs. the broad market as the stock trades a forward price-to-earnings multiple of roughly 22.5X, well ahead of the S&P 500 at 14X.

The average estimate of analysts polled by Thomson Reuters is for earnings of $1.31 a share from Costco in its fiscal fourth quarter ended in September on revenue of $31.69 billion. An in-line performance in what is typically the company's strongest quarter of the year would compare to a year-ago profit of $1.08 a share on revenue of $28.18 billion.

The sell side is split on the stock ahead of the numbers with 14 analysts bullish at strong buy (7) and buy (7), and 12 analysts in the bear camp at hold (8), underperform (3) and sell (1). The median 12-month price target sits at $99, offering little upside to Tuesday's close at $99.64.

Costco reported its September sales on Oct. 4 with net sales totaling $9.31 billion for the month and same-store sales rising 6%. McAdams Wright Ragen previewed the quarter last week after the release of the sales numbers noting higher gas prices and positive foreign currency translation gave the numbers a boost with traffic counts increased 4% and the average transaction rose a little more than 2%.

The firm, which has a hold rating and $98 price target on the stock, thinks an in-line quarter is the most likely scenario.

"We expect operating margins to improve," McAdams wrote. "With comps growth in the mid-single digits, the benefit of an extra week (17 weeks versus 16 weeks a year ago), and the growing impact of the membership fee increase (which took effect nearly a year ago), we expect operating margins to improve by 17 bps year over year (to 2.9%). We think there's some potential earnings upside, but in our view the stock is priced for perfection."

Check out TheStreet's quote page for Costco Wholesale for year-to-date share performance, analyst ratings, earnings estimates and much more.

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