eyeQ: vital clues on health of the US consumer

"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." eyeQ

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Costco

Macro Relevance: 64%
Model Value: $901.85
Fair Value Gap: +0.72% premium to model value

Data correct as at 26 September 2024. Please click glossary for explanation of terms. Long-term strategic model.

Costco Wholesale Corp (NASDAQ:COST) report earnings today. This is an important stock to watch right now for two reasons:

Trading down. Along with Walmart Inc (NYSE:WMT), Costco is probably the top US retailer right now. Both have performed strongly by appealing to consumers struggling with the cost-of-living crisis: there are anecdotal stories suggesting America’s upper and middle classes are increasingly shopping at their warehouses.

That shift in consumer behaviour has helped produce strong results. Last quarter, Costco beat on both earnings and revenue. But now the pressure is on for them to maintain that.  

Strikes. 50,000 workers at 36 US ports see their current contracts expire on Monday. If there’s no resolution between the port owners and the International Longshoremen’s Association, strikes could begin as soon as next Tuesday. This is a big deal. For example, one estimate says nearly 150 ships are on their way to affected ports carrying cargo with an estimated value of $34.3 billion (£25.6 billion), just in time for the busy shopping period over Thanksgiving and Christmas.

It will be important to see if Costco management give any clues about how they’re planning to handle any disruption. This is an issue that will impact the entire US retail sector.

So, tonight’s results could contain some vital clues on the health of the US consumer and the threat of crippling industrial action.

The eyeQ take on Costco is simple. Macro conditions have been improving for nearly a year now – eyeQ model value has been consistently trending higher. Recently though, that upward trend has lost a little momentum. It could just be a pause that refreshes. But keep an eye on model value to get a sense of whether the stock can continue to perform.

There’s no valuation edge – Costco trades close to our macro-warranted fair value of around $900. Put another way, a healthy US macro backdrop has justified Costco’s rally. But, once again, this puts the emphasis on watching eyeQ model value to see if this upward macro momentum can be maintained.

Source: eyeQ. Past performance is not a guide to future performance. 

Useful terminology:

Model value

Where our smart machine calculates that any stock market index, single stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.

Model (macro) relevance

How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.

Fair Value Gap (FVG)

The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.

Long Term model

This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.