Costco Shares Higher As JPMorgan Adds To Focus List

With gas prices declining, consumers spent a significant portion of their gas savings on food, both at grocery stores. Costco Wholesale Corporation COST witnessed increased traffic from August 2014 to April 2015, resulting in stiff comps thereafter.

JPMorgan's Christopher Horvers maintained an Overweight rating for the company, with a price target of $180. The analyst added Costco to the Focus List, saying that the stock is “facing a rare period of uncertainty,” which has created a 22 percent upside through yearend.

Reasons For Upside

April is Costco's last month with 5 percent traffic comps. From May through September the comps decline to 4 percent and 3 percent thereafter.

The transition from Amex to Visa, scheduled in June, is likely to boost traffic and basket in 2H, analyst Christopher Horvers said.

Deflation had pulled down comps by ~100 bps in the latest quarter. This headwind is expected to annualize this summer.

“While bears worry about the recent upturn in gas prices and how that could squeeze margins, we note FX dragged earnings by 26 cents in FY15 and COST could see some better SG&A leverage with lower FX/gas price headwinds,” Horvers wrote.

The uncertainty related to Costco's is magnified by a potential MFI increase in 2017. “In our view, this means that simply getting through each of these events biases the stock higher (and fast),” the analyst commented.