Bank of America revamps Costco stock price before earnings

If you thought Costco (COST) was already expensive at $988 a share, Bank of America has some news for you. The bank reinstated coverage Monday with a Buy rating and a $1,185 price target, one of the more aggressive calls on the stock right now, arguing the warehouse giant still has 20 percent upside from here.Shares jumped 2.8 percent to $1,012 intraday. Not bad for a stock that has already been outrunning the S&P 500 by 15 points this year, even as banks cratered and tech stalled out. Especially given that the move comes before earnings, scheduled for March 6.Analyst Robert Ohmes is not just saying Costco is a safe haven. He says Wall Street has been getting the story wrong and that the real money has not been made yet.Why Bank of America is calling Costco recession-proofHere is the thing about Costco that most people still underestimate. The actual retail business, the rotisserie chickens, the $1.50 hot dogs, the bulk paper towels, is almost secondary. What Ohmes is really pounding the table on is the membership machine underneath it all.Costco has roughly 135 million cardholders. Its renewal rates are 93 percent globally and 96 percent in the U.S. People simply do not quit Costco. That produces $5.2 billion in annual fee revenue at margins close to 90 percent, money that comes in before a single item hits a shopping cart.That cash is what lets Costco price everything else aggressively, which keeps shoppers coming back, which keeps renewals high. Competitors have been trying to crack this model for decades. None of them have.More Retail:Costco sees major shift in member behaviorRetail chain shuts all locations as legal changes hit industryLululemon struggles to reverse concerning customer behaviorAnd Costco just made the engine more profitable. The company raised its executive membership to $130 from $120 and its primary membership to $65 from $60, the first hike since 2017. Bank of America figures that alone adds about $800 million to earnings over the next two years.What is driving the bull caseMembership renewal rates of 93 percent globally generate $5.2 billion in near-pure-profit annual fee revenueComparable sales grew 6.4 percent last quarter, excluding gas and currency swingsE-commerce jumped 22 percent, with digital penetration doubling from four to eight percent over three yearsKirkland Signature private label drives 30 percent of total sales, typically priced 20 percent below name brandsNew warehouses in China and Europe are still in early innings, adding a real long-term growth runwayHow Costco's recent results back the upgradeThis is not a call built on hope. The numbers are already showing up. Costco's first-quarter earnings came in at $4.50 per share, ahead of the $4.27 the Street was expecting. Revenue grew 8.2 percent to $65.98 billion, with U.S. comparable sales up 5.9 percent excluding gas.Electronics and apparel bounced back. Fresh foods kept pulling traffic through the door. Management guided for six to eight percent full-year comparable sales growth, with the membership fee bump expected to kick in harder in the second half. Photo by Cheng Xin on Getty Images On top of that, Costco raised its quarterly dividend from $1.16 to $1.30 per share, keeping its streak of roughly 12 percent annual dividend growth intact. The company has also paid out several large special dividends over the years, which tends to surprise income investors in the best possible way.How Costco stacks up on valuationCostco trades at 52 times forward earnings, steep but underpinned by 15 percent expected earnings-per-share growthSam's Club, its closest rival, trades at just 32 times on slower growthWalmart checks in at 28 times, making clear the market has always paid a premium for Costco's consistencyFree cash flow funds roughly $7 billion in annual buybacks on top of the growing dividendBank of America's bull case goes to $1,300 if comparable sales push to 10 percentWhat investors should watch from hereThe real test hits in April when Costco drops second-quarter results. That is when investors will get the first clean read on whether the membership fee hike is actually moving the needle on earnings, or getting masked by other cost pressures.Competition is real but manageable. Sam's Club has been spending aggressively to close the gap, and Amazon Fresh is always lurking around grocery. Still, nobody has figured out how to replicate Costco's treasure-hunt format, its return policy culture, or the sheer psychological pull of a membership people feel bad wasting. Churn sits below two percent for a reason.The other thing worth watching is the analyst herd. Wall Street's consensus is still a Moderate Buy with an average target of $1,014, well below where Bank of America just planted its flag. If the Q2 numbers come in strong, more upgrades almost certainly follow, and that tends to have its own effect on the stock.For now, Monday's call is a reminder that even at four digits a share, not everyone thinks Costco's best days are behind it.Related: Costco members saddened over discontinued items