Costco Worth $200? Deutsche Bank Jumps On The Bull Train

• Costco Wholesale Corporation COST shares have gained 17 percent in the last three months, crossing the $160 mark in mid-November.
• Deutsche Bank’s Paul Trussell upgraded the rating on the company from Hold to Buy, while raising the price target from $152 to $200.
• Trussell said that there are several positive things happening right now, and there are too many catalysts to ignore.

Analyst Paul Trussell mentioned that the rating on Costco had been cut earlier this year due to valuation.

He added that the move has now proven to be “too near-term focused,” with the market exhibiting a clear willing to pay a premium “for traffic consistency, a steady income stream through membership, international growth opportunities, and, importantly, an Amazon-proof business model,” despite the challenging retail environment.

While several other retailers are “struggling to maintain positive momentum,” there appears to be an upward linear trend in Costco’s core SSS trend, with increased trips being triggered by fresh and organic foods as well as lower gas prices.

Trussell added, “We think that the gas and food offering combined with the in-store treasure hunt experience provide a powerful competitive advantage that can continue to fend off online competitors,” such as Amazon.com, Inc. AMZN. He also believes that higher gas profitability is “driving ancillary GPM and in turn EPS ahead of Street estimates.”

Costco is switching to co-branded Visa cards from Amex in March/April 2016. This is likely to result in incremental traffic through “fee savings funneled into an improved rewards program.” Trussell expects an MFI increase in FY17 and IT modernization efforts to taper in FY18.

Costco’s efforts are ramping up internationally, which should propel sales and result in margin expansion. The analyst further added that currency pressure should alleviate as the year progresses.

“Looking over the next 18 months, there are now too many catalysts to ignore (e.g. organic food growth, higher gas margins, credit card change to Visa, MFI increase) and so we are getting back on the bus,” the Deutsche Bank report noted.