Deutsche Bank: Lots Of Long-Term Factors To Like In Costco, But Stay On Sidelines

Costco Wholesale Corporation COST came out with mixed quarterly earnings on Wednesday, following which its shares dropped on Thursday.

Deutsche Bank analyst Paul Trussell was on CNBC to weigh in on Costco’s earnings.

Stay On Sidelines

“Costco is a very high-quality retailer that’s been posting strong results for quite some time, especially on a relative basis,” Trussell said. “That said, at current valuation, 25-26 times forward earnings, I think the third quarter print was simply just in-line and with those headwinds continuing of the FX and gas, coupled with increased investments in IT, frankly we think that staying on the sidelines is the best approach for the time being.”

Impact Of Gas

On the kind of impact gas prices have on Costco’s income, Trussell said, “Gas has had a very meaningful impact to Costco’s P&L. It’s roughly about 8 percent of sales, but it ranges with gas prices being still lower year-over-year. It’s now a smaller percent of sales, which actually overall helps the company’s gross margin and what we will note that in this particular print Costco’s sales actually missed a little bit, expenses were higher than we expected, but gross margins did beat.”

Phenomenal Business Model

On the outlook for the company going forward, Trussell said, “Long-term, Costco has a phenomenal business model. I would add that not only a high renewal rate on the membership fee, but the fact that they are continuing to expand globally, they are in multiple countries, and look, they just did a big deal moving from American Express to Visa that could actually pat the bottom line. So there’s a lot of long-term factors to like here.”