Costco (COST) Rallies After a Flurry of Upgrades

Shares of wholesale retailer Costco (COST: Charts, News) rallied this week after analysts at Stifel Nicolaus raised their price target on the stock from $100 to $107, citing strong gross margin and an inflation-resistant business model as its primary growth catalysts.

The firm also expects Costco to beat earnings and same-store sales expectations. Bank of America also raised its price target on Costco from $98 to $100. Meanwhile, Argus analysts raised their price target from $100 to $110. All three firms have a buy rating on the stock. Piper Jaffray reiterated its overweight rating, with a $112 price target. JPMorgan Chase also reiterated its overweight rating with a price target of $101. Analysts at Guggenheim remained neutral, with an $85 price target on the stock. However, analysts at Bernstein disagreed with the widely bullish sentiment, reiterating their underperform rating on the stock. Daily Chart
Shares of Costco have risen 22% over the past twelve months, and 62.5% over the past five years. The company's large wholesale warehouses, which generate a large percentage of their revenue through membership fees, offer both branded and private-label products in a wide range of merchandise categories, including food, appliances and clothing. Costco's own "Kirkland Signature" brand comprises 15% of total brands offered, which generate 20% of total sales. Like Wal-Mart (WMT: Charts, News), and its wholesale segment Sam's Club, Costco operates on a high volume, low margin business model. Costco operates its wholesale operations at a faster turnover rate than Wal-Mart, Target (TGT: Charts, News) or Dollar General (DG: Charts, News), and average sales per square foot have sequentially increased over the past decade, from $103 per square foot in 2002 to $146 in 2011. At a single high earning location, Costco generated a record $400 million in sales. The company operates 602 warehouses globally, with 72.5% of revenue coming from the United States, 15.7% from Canada, and 11% from the rest of the world. Globally, Costco boasts a fee-paying member base of 66.5 million. Costco's annual fee is the key to its profitability. Without the membership fees, which generated $1.9 billion in revenue in fiscal 2011, the company's operating margin is a slim 0.6%. With other overhead costs taken into account, Costco's margins would actually be negative. Fortunately for shareholders, Costco has been able to consistently raise its membership fees without adversely impacting sales volume. Costco's forecast 2013 free cash flow of $1.9 billion will also match its fiscal 2012 results, proving that the company's finances are robust. Despite Costco's positive catalysts, some analysts and investors are concerned with the company's fundamental valuations. The stock currently trades at 28 times trailing earnings and 22.5 times forward earnings. In comparison, Wal-Mart trades at 15.7 times trailing earnings and 13.9 times forward earnings. Wal-Mart's 5-year PEG ratio of 1.8 also looks moderately cheaper than Costco's 2.0 ratio. Costco has traded in a wide 52-week range between $78.41 and $103.51, leading some traders to believe that the stock can be bought at lower prices. Costco pays a quarterly dividend of 28 cents per share - a 1.1% yield at current prices. Costco reports its fourth quarter earnings on Wednesday, October 10. Other News About COST Stifel Nicolaus Raises PT to $107 on Costco Wholesale Costco catches an important upgrade. Too Late To Buy Costco? Is Costco too expensive at these levels? Other Stocks in the News Will Best Buy Go Private? The Best Buy drama continues as the founder, investors and board battle it out. Target's Temporary Promotions Don't Give It An Edge Over Wal-Mart Target is still lagging Wal-Mart and Costco. Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Oct 4, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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