UPDATE: UBS Upgrades Costco Wholesale (COST) to Buy

(Updated - October 26, 2015 10:08 AM EDT)

UBS upgraded Costco Wholesale (NASDAQ: COST) from Neutral to Buy with a price target of $180.00 (from $153.00). Analyst Michael Lasser thinks the switch from Amex to Visa will lead to 2 million members and $4 billion in sales.

"Our more constructive view is based on several factors: 1) we think the benefit to COST from the move to Visa from Amex is greatly under-appreciated; 2) the stock should be supported as the market looks forward to the company raising its membership fee in late '16 or early '17; 3) the company's gross margin should be supported by rapid growth of its ancillary business and stable fuel prices, 4) currency should be less of a drag on its top-line in the coming quarters, and 5) capital allocation working in shareholders' favor. We recognize that COST sports a big multiple (25x ’17 cons EPS), but we think the premium is more than justified given the durability and portability of the business, along with the potential for another upward inflection in the co's trends," said Lasser.

The analyst added, "We partnered with the UBS Evidence Lab to survey 5k consumers about their relationships with COST, and conducted a geospatial market sizing analysis of Costco's store footprint. Our survey found that 10% of those who are not currently COST members cited this retailer not accepting Visa or MasterCard as a primary reason for not being a member (1% said it's the only reason). Assuming 5% of non-members living w/in a 15 min. drive time of an existing warehouse join as a result of this switch (so only half of those who indicated not accepting Visa is an impediment), it would add an incremental ~2 mm members (4.4% growth vs '15) & ~$4 bn in sales (also 4.4% growth vs '15). Also, we believe that there will be other benefits to COST's P&L, such as greater spend per member & a reduction in tender fees, adding another ~2-3% to FY'17 EPS."

For an analyst ratings summary and ratings history on Costco Wholesale click here. For more ratings news on Costco Wholesale click here.

Shares of Costco Wholesale closed at $155.74 yesterday.

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