Costco could benefit as it becomes possible to have parties again, the analyst said.
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Costco Wholesale took a hit after reporting mixed earnings last week, but the discounter’s stock is rising Thursday, following an upgrade from Wells Fargo, which calls the selloff a buying opportunity.
Analyst Edward Kelly raised his rating on Costco (COST) to Overweight from Equal Weight and his price target to $370 from $340. He said “the market’s contempt for Covid beneficiaries” is leading investors to overlook the longer-term gains he believes the company will see from the pandemic.
Costco was up 1.6% to $329 in premarket trading. Other analysts have similarly defended Costco in recent days.
Kelly said that Costco shares are back around pre-pandemic levels, even as it has reported 19% gains in same-store sales of consumable goods in the last three quarters and a 21% increase in general merchandise. Those numbers put it well ahead of its peers.
“Costco will likely give back some share, but it’s hard to imagine it all goes away as the stock seems to suggest,” he wrote. “In fact, Costco could see some reopening benefit from the return of parties and its services business.”
In addition, while investors may be anticipating a return to normalcy, Kelly doesn’t think that consumer will simply go back to their 2019 habits. Surveys show at least some permanence for working remotely, which should lead more people to eat at home than they did previously. In addition, the strength in the housing market, particularly for single-family residences show that the move to the suburbs—home to Costco’s target audience—has been substantial.
The company is due for another round of membership-fee increases this year and next for its international and domestic businesses, he said, while Costco’s valuation relative to the S&P 500 is near the bottom of its ten-year range.
“Costco remains a unique asset in U.S. consumer, as its membership model has a large competitive moat in pricing, merchandising, experience, and overall customer loyalty vs. peers,” he wrote. With a more robust digital business and growing international presence, there is reason to be optimistic about its long-term potential, he believes.
Write to Teresa Rivas at [email protected]
