Costco Upgraded As Analyst Projects A Widening Competitive Moat

Costco Wholesale Corporation COST reported impressive fiscal first quarter earnings last week that solidified the bullish case for owning the stock, according to one Wall Street analyst.

The Analyst

BMO Capital Markets' Kelly Bania upgraded Costco's stock rating from Market Perform to Outperform with a price target boosted from $160 to $215.

The Thesis

Costco now has "more valuation support" for multiple reasons, Bania said in the upgrade note. (See the analyst's track record here.)

Bania said the factors in Costco's valuation include:

The ability to win a greater share of total spend from its loyal members given a focus on digital relationship.
Opportunities in personalization.
Improved member awareness.
Additional digital services such as potential auto-replenishment.

These positive catalysts also support a stronger outlook for Costco's membership renewal trends as it improves its demographic and geographic reach and drastically increases membership advantages, Bania said.

Perhaps more important to Costco's story is an acceleration in online sales from less than 15 percent in recent months to 30 percent-plus, Bania said. The warehouse club has enacted a soft launch of two new online grocery services, and this comes at a time when Costco likely realizes that customers who buy groceries online tend to spend more across both online and offline channels, according to BMO.

"Similar to Wal-Mart Stores Inc WMT, we believe COST's valuation could expand as the company widens its competitive moat with a deeper digital relationship with its loyal customer base," Bania said.