UBS Maintains Neutral On Costco, Increases PT To $125


In a research report issued today, UBS analyst Jason DeRise maintained a Neutral rating on Costco Wholesale Corp. (NASDAQ:COST) and increased his price target to $125 (from $124) ahead of the company’s release of its Q4 earnings.

DeRise said, “Costco previously reported Q4 net sales of $34.8bn on September 4, driven by 7% comparable store sales growth ex fuel and FX. The unknowns are, in order of importance, the membership fee income (MFI) and ex-MFI EBIT margin. We estimate Q4 membership fee income of $765m, up 6.9% y/y (7.5% ex fx), driven by 4.6% store growth and 2.4% member/store growth (similar to last quarter). We project EBIT margin ex-MFI of 0.9%, up ~15bps y/y. Last Q4 marked the start of the gross margin pressure from fresh food inflation, particularly on poultry prices (compared to Costco’s flat $4 charge for its rotisserie chicken). We believe COST found a supplier focused solution to offset this gross margin pressure since then (definitely did not raise the price of the chicken). As it laps this headwind, we expect y/y retail margin expansion.”

The analyst added, “Though Costco’s performance year-to-date has been in line with the Consumer Staples sector, it is now trades ~1 standard deviation above its historic multiples on EV/membership fee and price/membership fee bases (see report for details). While we continue to believe its virtuous circle structure creates a difficult to replicate sustainable competitive advantage, we believe the company’s valuation is full at the current time.”

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Jason DeRise has a total average return of 2.6% and a 63.6% success rate. DeRise has a 14.3% average return when recommending COST, and is ranked #1494 out of 3314 analysts.

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