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Don't Be So Quick to Dump Costco or Eastman Chemical

These are our articles posted on Seeking Alpha. Click "READ MORE" if you would like to read the rest of the articles.

Does Costco Make A Good Short?

Summary

  • Costco’s shares look unattractively priced but their pricing may be warranted.
  • Costco’s decision to switch to Visa tells me that the company is now looking to attract millennials.
  • Owing to the underlying strength of Costco’s business, which is driven by efficiency and consumer loyalty, I believe Costco would have been a monster even ‘without’ membership revenue.
  • E-commerce could be another catalyst that could drive Costco higher.

You may want to put Costco's stock in your cart in addition to its products.

At 30x TTM earnings, Costco (NASDAQ:COST) is trading at a premium to its industry peers. Even the forward PE multiple is sitting ~45% above the industry average, so it is clear that the shares are relatively expensive and that there are high growth expectations associated with Costco. Many analysts believe that the premium valuation isn't justified at the moment considering Costco can't keep accelerating store growth in the U.S as it is precipitously approaching an inevitable saturation point. Comps sales growth was 1% in 2015 versus a whopping 10% in 2011.

All this isn't too surprising given the scale of Costco's business. Costco sells more than $100 billion of merchandise through its warehouses that contain nearly 100 million square feet of operating floor space. A business operating at such a large scale has to slow down at some point. But 'slowing down' can be interpreted in different ways and that is why there are disagreements.

My view is that concerns regarding Costco's growth prospects are justified only to a certain extent and analysts may be ignoring a couple of key catalysts that could drive Costco higher... READ MORE



Eastman Chemical Has Further Upside

Summary

  • Eastman Chemical has been expanding its revenue base and increasing its earnings consecutively for the last six years due to successful investment strategies.
  • Its stock has gained a lot of momentum in the last two months, but the stock still appears undervalued.
  • The company’s dividend growth is safe, thanks to a record level of free cash flows.
  • Hold on to this stock for even more gains.

Eastman Chemical (NYSE:EMN) has been posting significant growth in its earnings per share for the past six consecutive years. The company's strong performance is the result of its portfolio-related initiatives, acquisitions, innovations, and cost cutting.

At the same time, the company's solid financial performance has laid the groundwork for potential investments in growth opportunities. In fiscal 2015, the company reduced its debt by $500 million, but still generated record free cash flow of $9 60 million. This massive free cash flow bonanza has allowed the company to make hefty increases to its dividends. Recently, it upped its quarterly dividend by 15%, making this a sixth year of successive growth, during which time it has more than doubled its dividends.

Eastman continues to enhance its share price and boost its financial performance with a concentration on reducing its outstanding shares. In last year alone, it repurchased $103 million of outstanding shares, including $55 million in the fourth quarter. The combination of regular increases in dividends and share buybacks represent a continued confidence in future business fundamentals and cash flows... READ MORE

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