By Sabrina Escobar

Costco Wholesale's lofty price tag has long been cited by skeptics as a reason to steer clear of the shares. Barron's made the argument for taking profits in December.

But the stock's 7% pullback following a weaker-than-expected second-quarter earnings report has created a more attractive entry point "for a top recession hedge idea," wrote TD Cowen analyst Oliver Chen on Wednesday.

The stock trades at 49.8 times the per-share earnings expected for next year, which Chen acknowledges is elevated compared with the rest of the sector. That said, the figure is in line with the stock's trailing 12-month average price/earnings ratio, he wrote, saying the stock is well valued for a business that has fared well even in economic downturns. In each of the past three official recessions, Costco's valuation on a price/earnings basis has only declined by about 6% to 9%, Chen estimated.

Most economists' forecasts don't reflect a fully fledged recession occurring this year. But concern about the effects of President Donald Trump's tariffs and other policies has added to expectations that a downturn could happen.

Costco's wholesale club business model is a big reason the company and the stock tend to hold up better than competitors during economic uncertainty, Chen wrote. Wholesale clubs are a safe bet in tough times because they focus on affordable groceries and have steady income from memberships. At the same time, selling higher-priced discretionary products helps them grow when the economy is strong.

"Costco offers protection and superior value execution which could grow in importance as overall consumer pressures may intensify," Chen wrote.

Chen is also bullish on BJ's Wholesale, which TD Cowen lists as one of its best ideas for 2025. From a valuation standpoint, BJ's may be slightly more appealing, with shares trading hands at 26.6 times forward earnings.

What sets Costco apart, however, is the company's capacity to keep prices low, and management's "iconic ability to strategically say 'no' to unnecessary change," Chen wrote. "This is the winning mindset that upholds Costco's unwavering focus on value, quality, and newness which increasingly benefits from a high degree of consumer trust across various economic cycles," he said.

That isn't to say the company is resting on its laurels. Costco's new management team has started investing more heavily in digital initiatives that could continue increasing value for members, including better e-commerce service and building out an in-house digital advertising business, or retail media network.

Shares of Costco were up 0.4% to $958.44 in early morning trading Wednesday. The stock is up 4.6% this year.

The next test for Costco stock will be the release of the company's March sales, scheduled for April 9 after the close of trading. It's likely the company had another solid month: Credit-card data tracked by Bloomberg indicate sales are up 6.5% from a year earlier on average.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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April 02, 2025 10:45 ET (14:45 GMT)

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