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Costco stock: 5 takes from Wall Street analysts

No doubt that Costco (COST) has had a pretty good year.

For one thing, Yahoo Finance's 2022 Company of the Year has outperformed the bearish market — the stock so far this year is down 13% to about $495 a share compared to a decline of 15% for the S&P 500 (^GSPC) as of December 2. In addition, many investors love the big box retailer because of its fanatic customers and strong balance sheet.

Of course, there are some critics. They are wary of the company’s high valuation amid scary times in the markets and the economy.

So what are COST's prospects? Yahoo Finance recently spoke with five Wall Street securities analysts to get their thoughts. Here are their edited takes:

Ivan Feinseth, Tigress Financial Partners

What's good about Costco stock: The company consistently reports strong same-store sales growth in both good and difficult retail environments. Costco remains well-positioned to see increases in online and in-store traffic, largely because it provides consumers with a significant low-cost value proposition. In addition, Costco is benefiting from growing service offerings, including travel, home improvement and expanded business services. Renewal rates are also at an all-time high.

What's concerning: What's always concerning is changes in consumer spending trends in light of economic changes.

Rating/Price Target: Buy/$678

Final thoughts: Costco continues to endure in good times as consumers increase spending on discretionary items (like air-travel). In difficult economic times consumers look for bargains. You can see that by the strength of memberships, which continue to grow. Their customers pay for the opportunity to shop there and believe that it's worth the fee because of Costco's strong value proposition.

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Oliver Chen, Cowen

What's good about Costco stock: Costco remains a top consumer brand for us— our take is that the company is well positioned for strong top-line performance given encouraging historical consistency and a unique membership model focused on deep value. We particularly like Costco’s differentiation through its Kirkland Signature private label and limited assortment across 3,500 stock keeping units (SKU’s), which gives the company immense buying power.

What's concerning: In our view, key debates around Costco remain: (1) the emergence of tougher comparable metrics as the company continues to drive consistent growth; (2) evolution of consumer behaviors and the company’s ability to maintain loyalty and sticky membership metrics; (3) high valuation given current price to earnings ratio, which has contracted by five percent from its three-year mean.

Rating/Price Target: Outperform/$650

Final thoughts: We believe the company has both the capacity and experience to drive continued strong retail execution and we believe core competencies. A key strength is that Costco is one of a handful of American concepts to find relative success on a global scale. Also: Its size makes it one of the top buyers with great purchasing power across a limited assortment of items. Finally, Costco's unique vertically integrated supply chain lends to impressive distribution and cost efficiencies, (That's why) we maintain an "outperform" rating.

Michael Baker, D.A. Davidson

What's good about Costco stock: Positives for the stock would include outsized and consistent same-store sales growth.

What's concerning: Our biggest concern and the reason why we have a neutral rating is COST’s above average multiple. We have also seen some declines in gross margin.

Rating/Price Target: Neutral/$455

Final thoughts: Costco is a top notch operator with strong sales and profit trends and outlook. But, we do believe that is reflected in the current stock price.

Chuck Grom, Gordon Haskett Research Advisors

What's good about Costco stock: Consistency of the core comp business month-to-month, which has usually been led by healthy traffic trends. Also, the membership fee stream is an annuity with a long duration. The balance sheet is also very healthy with low leverage and ample cash.

What's concerning: Valuation has always been a sticking point for investors, but that’s been the case for the 20+ years I’ve covered Costco.

Rating/PriceTarget: Buy/$600

Final thoughts: Costco does what’s right for its customers first, employees second, and shareholders third. That approach makes it one of the best retailers we cover.

Corey Tarlowe, Jefferies

What’s good about Costco stock: the current [economic] backdrop, it's a business that's really well positioned. It has a membership model that drives recurring revenue; it has very stable margins and predictable cash flow. It's a business that in times when inflation is running at 8%, more consumers are looking for ways to save money. And Costco is a great way to do that with prices better than most other retailers in the U.S. It's a business that also has many growth drivers ahead (such as a) potential increase in its membership fee.

What’s concerning: It has had a really strong year this year. So lapping this year might be a little bit of a difficult hurdle next year. But it's nonetheless something that I think Costco will be able to achieve.

Rating/Price Target: Buy/$610

Final thoughts: It's a business that's really well positioned in the present environment. We don't know what to expect from a macro economic standpoint ahead. But it's a business, like I said, that does great in good times, and even good in bad times. It's a stock you want to own today.

More Yahoo Finance Company of the Year 2022 coverage:

Dylan Croll is a reporter and researcher at Yahoo Finance. Follow him on Twitter at @CrollonPatrol.

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