Analysts remain confident in Costco despite post-earnings drop
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Costco Wholesale Corp. (NASDAQ:COST) is still considered âbest in classâ by many Wall Street analysts despite a post-earnings dip.

Shares of Costco Wholesale Corp. (COST) slid 4.58% in afternoon trading on Friday as some concerns on margins in the earnings report, recessionary worries hitting many consumer names, and adverse technical indicators hit the stock. 

âMargin performance was mixed as costs beat but gross margin missed modestly to the downside,â Wells Fargo analyst Edward Kelly commented after the earnings result. âThe latter was likely the bigger surprise to investors, as OPIS data suggested cpg fuel margins ~2X year-ago levels, but a $223m LIFO charge in the quarter and continued pressure in the core were likely to blame.â

Nonetheless, Kelly maintained a Buy-equivalent rating on the stock given positive commentary on inflation and remarkable pricing power and membership trends. Further, guidance suggests recovery from that point that will likely assuage margin concerns, while inventory levels also appear in âgood shape.â

âOverall, the quarter was clearly not the beat many were looking for and the lack of news around a membership fee increase likely disappointed as well, but it's tough to be too terribly critical here given COST is visibly navigating current retail challenges better than most,â he concluded. âWe find it difficult not to like a defensive, structural share-taker and value-player against the current backdrop, and we remain Overweight.â

In terms of the latter commentary on continued bullishness, Kelly was far from alone on Friday. 

For example, Baird analyst Peter Benedict advised clients that while higher wages weighed in margins and SG&A was higher than anticipated, record membership renewals and strong sales figures should keep investors confident in the stock. He added that âencouraging early holiday demand and emerging signs of moderating cost inflationâ are key positive signs to take away from the call. 

âThe COST train remains on track and well positioned to take share in any economic environment,â he concluded, reiterating an âOutperformâ rating alongside Kelly. 

Finally, Morgan Stanley analyst Simeon Gutman reiterated a âBuyâ rating and called the company âfundamentally a best in class retailer.â However, he also indicated that the stock had gotten slightly ahead of itself prior to earnings. As such, a pullback post-earnings and into next week could present a better opportunity for investors. 

âFor context, the last three times COST's stock meaningfully corrected and presented good buying opportunities (i.e., in March '21, January '22, and May '22), the NTM P/E multiple contracted ~24% from peak to trough on average,â he explained. âThe stock's recent derating since mid-August has been about 13%. This means there could be some more valuation downside (around 10%) before becoming an attractive buying opportunity on a risk/reward basis.â
Read the earnings call transcript.