Costco Started at Overweight at Morgan Stanley

Costco COST was initiated at overweight with a $134 price target (16.3 percent upside) by Morgan Stanley Monday night.

A key reason for the valuation is the downside risk. “Given COST's healthy top-line trends (6% comps over the last three years) and our expectation that they continue, coupled with a highly insulated P/E multiple reflecting the business' favorable positioning in the physical and emerging omni-channel landscape. Our Earnings Capitalization model suggests that COST is pricing in 9% average earnings growth over the next 10 years.”

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Analyst Simeon Gutman expects earnings growth of 13 percent.

An interesting comment from the note is that Costco has very little ecommerce exposure, but that is not a bad thing and may actually be responsible for its premium valuation. However, quickly growing food delivery solutions may challenge Costco’s Business.

The $134 price target is based on 25.5 times Morgan Stanley’s EPS of $5.22 for 2015.