On Friday, Morgan Stanley (NYSE:MS) maintained its Overweight rating on Costco Wholesale (NASDAQ:COST) and increased its price target to $1,150 from the previous $950. The new price target is based on approximately 56 times the expected calendar year 2026 earnings per share (EPS) of $20.84, up from the former valuation of 47 times the forecasted EPS of $20.35. Currently trading at a P/E ratio of 59.65 and near its 52-week high of $1,007.80, Costco has demonstrated remarkable market performance with a 50.61% year-to-date return.
The adjustment reflects Morgan Stanley's confidence in Costco's accelerating earnings momentum, as the market favors companies with strong visibility and the ability to thrive amidst industry challenges. The firm's analysts believe Costco's price-to-earnings (P/E) ratio of 56 is justified by its consistent performance and potential for earnings growth.
According to InvestingPro, Costco maintains a "GREAT" financial health score and has shown steady revenue growth of 5.02% over the last twelve months. For deeper insights into Costco's valuation and growth metrics, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.
Costco's robust track record of stability and its anticipated earnings growth in the medium term have led Morgan Stanley to support a target multiple that is 2.3 times greater than the P/E of the S&P 500, which is at the upper end of Costco's historical range. This is seen as fitting given the company's established history of resilience.
The firm's projections for Costco include a total comparable sales growth of approximately 5.8% in fiscal year 2025, with an earnings before interest and taxes (EBIT) margin expansion of around 16 basis points, driven by improvements in gross margin. This is expected to result in an EBIT growth of about 13% and an EPS growth of roughly 14%.
Looking further ahead into fiscal year 2026, Morgan Stanley anticipates a total comparable sales increase of about 6.4%, an EBIT margin expansion of approximately 8 basis points, and an EBIT and EPS growth of around 11% and 10%, respectively. For fiscal year 2027, the firm expects a continuation of this positive trend with total comparable sales growth of around 6.6%, a slight EBIT margin expansion, and a 10% growth in both EBIT and EPS.
InvestingPro data reveals that Costco's strong market position is supported by its $440.72B market capitalization and consistent dividend payments maintained for 21 consecutive years. Subscribers can access 15+ additional ProTips and detailed financial metrics to make more informed investment decisions.
However, the firm also acknowledges potential risks to its forecast, including a deceleration in comparable growth due to reduced consumer spending, limited margin expansion if Costco opts to reinvest efficiency gains into competitive pricing, and a slowdown in membership growth. Despite these risks, Morgan Stanley sees a favorable risk/reward balance with an upside of approximately 37% and a downside of about 14% in its bull and bear cases, respectively, and a 16% upside to the new $1,150 price target.
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