Costco Stock Rises as an Analyst Thinks Its Earnings Could Impress
Barron's
Sep 22, 2019
Costco Wholesale stock (COST) is ticking up Friday, helped by an upgrade from Gordon Haskett, which sees several catalysts for the discount retailer, including pending earnings that could surprise on the upside. The back story. Costco stock is up more than 41% year-to-date, while the S&P 500 has climbed around 20%. The company is expanding overseas and seeing strong sales trends, and many expect it to soon pay a special dividend.
That’s allowed the shares to largely sidestep the pressures facing peers, including an ongoing trade war and increasing competition from e-commerce.
What’s new. On Friday, Gordon Haskett analyst Chuck Grom boosted his rating on Costco to Accumulate from Hold, raising his price target to $330 from $255.
He writes that the upgrade comes after meeting with Costco’s chief financial officer and his recent research, which—along with a recent pullback in shares—leads him to believe that “current levels [are] a reasonable entry point to align ourselves back together with one of our favorite retail models.”
Looking ahead. Grom also raised his fiscal fourth-quarter earnings per share estimate to $2.66 to $2.57, above the consensus $2.54, as he believes the Street is underestimating the strength of Costco’s core business heading into the October report.
Yet he also thinks the company is making strategic long-term moves, as “Costco is finally going down the personalization journey to engage more with its existing customer base,” a strategy that is a long time coming, given high loyalty rates among its shoppers.
Moreover, he notes that markets have been more willing to reward retail giants with structural advantages this year—including Walmart (WMT), Target (TGT), and Home Depot (HD)—over turnaround stories, with Costco in the former category.
Costco’s steady earnings profile has made it a standout in retail over the years, with a model that most analysts praise. However, valuation remains one point of contention.
For Grom and others, the shares aren’t overpriced, but some have argued that even for a stock that’s long carried a premium, Costco looks pricey. Friday saw Guggenheim’s John Heinbockel predict a better-than-expected bottom-line result in Costco’s quarter, but he reiterated a Neutral rating on the shares “solely for valuation reasons.”