Shares of Costco Wholesale (COST) were higher by 1.38% to $159.31 on Monday, following a rating upgrade to “outperform” from “market perform” at Raymond James.
The rating change comes as the firm believes that Costco stock has been oversold in the wake of the blockbuster Amazon.com (AMZN) , Whole Foods (WFM) merger. Grocery and related stocks took a hit after the $13.7 billion deal was announced earlier this month.
With Amazon moving into the grocery space investors are concerned the industry will be faced with the same margin pressure that Amazon and other ecommerce platforms have placed on the retail sector.
However, Raymond James believes Costco will be able to weather the coming storm and defend itself from Amazon’s takeover.
“Since June 15 (the day before Amazon announced its Whole Foods acquisition), COST has pulled back ~13%, versus ~0% performance for the S&P 500. Admittedly, even with the recent pullback, Costco still trades at a premium valuation to the overall market and its large retail peers,” Raymond James said in a note.
“Nonetheless, its business model remains intact with healthy membership growth and strong renewal rates. In addition, prior year comparable sales comparisons remain favorable as we enter FY18 and earnings growth should begin to benefit from membership fee increases. So, while Amazon’s agreement to buy Whole Foods, when consummated, will add a new dimension to the grocery business, it does not materially impact Costco’s unique business model, and we would be buyers on COST’s recent weakness,” the note continued.
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