Wall Street thinks Costco's record-high stock can go higher. We agree and see catalysts coming

Published Thu, Dec 14 20236:01 AM EST

Wall Street analysts see more upside for Costco even as shares hit a record during Wednesday trading — a likely scenario in our assessment given the company's stellar outperformance compared to peers. That thesis will be put to the test when the wholesale retailer reports its fiscal 2024 first quarter after the closing bell on Thursday. According to the LSEG consensus analyst estimate, earnings-per-share are expected to increase more than 11% year-over-year to $3.42, with net sales increasing 8% to $57.72 billion. One day before earnings, Oppenheimer decided to raise its price target on Costco to $675 per share from $630. Shares hit an intraday all-time high of above $639 per share Wednesday. While removing Costco from their "top pick ranking due to valuation following significant outperformance lately," the analysts at Oppenheimer kept their buy-equivalent outperform rating on the stock. They said the "bull case remains intact" for Costco. The analysts at Oppenheimer said the company is "well positioned" relative to the retail industry. Costco shares are up nearly 40% year to date — double the S & P 500 's gain and way higher than Walmart 's 7% advance in 2023. Oppenheimer also cited a "potential membership fee hike and a special dividend" as positive catalysts for the stock in the coming quarters. We've been calling out these two possible moves, which are historically overdue, as reasons for long-term belief in the stock for a while now. Earlier this week, Deutsche Bank increased its Costco price target to $697 per share from $652 and kept its buy rating, saying the stock has room to run given the company's strong historical sales track record. "Costco is one of the most consistent operators in our coverage and we expect solid results this week," the analysts said. They raised its quarterly EPS estimates to $3.38 from $3.36, expecting better margins due to "better fuel profitability and a continued rational promotional environment." The analysts at Deutsche Bank anticipate that management will push back a potential membership increase announcement by three to six months as the company works through CEO Craig Jelinek's transition and macro pressures that impact the consumer. COST YTD mountain COST stock performance year-to-date. Like Oppenheimer, Costco's record high exceeds our Club price target of $630. However, we're going to wait for Thursday's results before making any adjustments. The Oppenheimer call is too trading-oriented for us. Costco is too quality of a stock and long-term compounder to try to catch a top and sell due to elevated valuations. We're maintaining our 2 rating on the stock — acknowledging its spectacular run higher and our discipline to advise members who don't own it to wait for a pullback. The immediate stock reaction to earnings has been mixed recently with the stock trading lower on three of its past eight earnings reports. One reason behind this lack of upside to quarterly reports has to do with the good news already being "priced in" since the retailer provides more frequent updates through its monthly sales releases. Most companies don't release monthly figures. For the 12 weeks that ended Nov. 26, Costco said net sales increased 6% to $56.71 billion. That's a bit lighter than fiscal Q1 net sales estimates. So, we'll have to see what the final quarterly numbers say. Bottom line Costco has time and time again proven to be the best-run retailer in its industry, producing consistent results in any economic environment. The company continues to demonstrate steady sales growth and market share gains as strapped-for-cash consumers and bargain hunters seek value. The strength of its warehouse membership model should allow Costco to continue expanding its footprint by opening new stores. Looking into 2024, we still expect the company to announce a membership fee hike at some point as inflation has come down, though any new challenges facing the consumer could push out this timeline. In addition, there's a possibility we see the company offer its shareholders a special dividend given its strong cash position. Both of these events — should they materialize — would represent potential catalysts that should send Costco shares higher. We expect management will be asked about these topics during Thursday evening's post-earnings conference call, but play down both in typical fashion with their "when, not if" stance. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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A Costco Wholesale warehouse sign is seen outside a store in Silver Spring, Maryland, on Aug. 5, 2023.

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