Wachovia Reiterates Buy on Costco (COST) Ahead of Q4 Earnings

October 7, 2008 11:57 AM EDT

Wachovia is out with a research note this morning previewing Costco Wholesale's (Nasdaq: COST) Q4 earnings, which are expected out Wednesday morning before the market opens. The firm believes Costco shares will face near-term risks, but, over the long-term, believes "the value creation driven by COST's growing membership fee income stream represents a positive underlying catalyst..." Wachovia reiterates its Buy rating and $74-$76 valuation range.

The firm raised its Q4 EPS estimate from $0.90 to $0.92, versus the Street estimate of $0.92, reflecting "less of a gas margin hit as COST's gas margins improve in a declining price environment." Wachovia is expecting Costco to report a 7% increase in September same store sales, consisting of 5% core comps plus 3% from gas minus 1% from foreign exchange.

Wachovia believes that Costco's FY09 guidance will be the area to focus on. As consumers are still very pessimistic, the firm feels that management will provide a "reasonably cautious outlook". As a result, Wachovia lowered its FY09 EPS estimate from $3.28 to $3.20, which compares to the Street estimate of $3.26.

Wachovia calls Costco's stream of membership fee income its "key point of differentiation between the company and other more traditional retailers", which makes this factor "one of the true underlying drivers of long-term value for the stock.

Costco Wholesale Corporation operates membership warehouses, which offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities.

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