Costco Holds Strong Potential, Healthy Membership and Club Growth: Morgan Stanley

Morgan Stanley analyst Simeon Gutman reiterated a Overweight rating on the shares of Costco Wholesale Corporation COST and raised the price target from $535 to $585.

Costco's Q4 revenues came in at $78.939 billion, which beat the consensus estimate of $77.9 billion.

COST is executing well with positive/steady same-store sales in the ~4% range, and overall top-line growth in the mid-single-digits, said the analyst.

The analyst asserted that membership trends remain healthy and productive club growth is continuing.

One of the reasons for being neutral on COST was due to some downside to FY'23 estimates from decelerating sales growth and lapping elevated gas profitability.

With those headwinds leveling off, FY'24 estimates look more reasonable and the analyst expects continued compounding on top-line and EBIT in the mid-single-digit range. 

The lack of an increase in membership fee shouldn't be a sign that one isn't coming in the next few quarters.

According to the analyst, COST's diversified category mix should benefit with consumables disinflation helping to drive stabilization in non-food categories.

There is modest upside to top-line estimates from both the direct pricing tailwind of higher gas prices and potential trade-in consumer behavior.

Overall, the analyst’s tactical bullishness is more muted, though a favorable risk/reward skew keeps the longer term bias positive.

Price Action: COST shares are trading higher by 2.44% at $566.14 on the last check Wednesday.