These Analysts Say The Bullish Case For Costco Remains Unchanged

Costco Wholesale Corporation COST reported Thursday fiscal third-quarter results. Two Street analysts reaffirmed a bullish stance on the stock.

UBS: 'Steady Results'

Costco reported "another set of steady results" highlighted by a consistent worldwide renewal rate of 88.3 percent, UBS analyst Michael Lasser wrote in a note. The Executive Membership penetration rose by the largest year-over-year gain since 2017 at 110 basis points to 38.4 percent. While members per average warehouse dropped 30 basis points from last quarter, it did rise 30 basis points on a two-year stack.

The company reported a 5.5-percent core same-store sales growth in the quarter. Lasser said this is evidence Costco continues to take market share and highlights the "underlying consistency" of the business.

Costco has multiple initiatives to support top-line growth, including the expansion of self-checkout counters from 125 to more than 250 U.S. locations. This should help in addressing a consumer "pain point" at busy locations and help management moderate labor expenses.

Lasser maintains a Buy rating on Costco with an unchanged $280 price target.

BMO: Premium Valuation Easy To Justify

Costco reported a "solid" quarter as EBIT grew by a mid-single digit and EPS grew at 11 percent, partly due to tax benefits, BMO Capital Markets' Kelly Bania wrote in a note. However, core gross margin rose at the strongest pace in recent by 21 basis points. The strong performance can be attributed to the company's business model, consistent execution and a loyal customer base.

One of the biggest concerns among investors is Costco's premium valuation of 15.5 times EV/EBITDA on 2020 estimates and a P/E of 28.8 on 2020 estimates. Bania said the valuation can be justified as Costco's report suggests its connection with members "continues to deepen" and there is a path for a mid-to-single-high digit EBIT growth through 2020

Bania maintains an Outperform rating with an unchanged $275 price target.

Price Action

Costco's stock traded lower by 1.7 percent to $237.32 per share Friday morning.

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