BJ’s Wholesale Fairly Discounted

BJ’s Wholesale Club Inc. (BJ) is the third largest warehouse club operator in the U.S. BJ’s reported better-than-expected results for the third-quarter, beating the EPS consensus by $0.03 and coming in at the high end of its most recent guidance. The upside was due to a boost in gasoline sales and profits. The company also upped its earnings guidance for fiscal 2008 from $2.10-$2.20 to $2.20-$2.30.

Even so, we are reducing our fiscal 2008 EPS estimate by $0.02 and our fiscal 2009 EPS estimate by $0.05. We think the BJ’s Wholesale’s efforts to improve its merchandise and increase store traffic have run its course, as it begins to go up against difficult comparisons from the year-ago period. This will make incremental gains more difficult to come by. We maintain our Hold rating.

BJ’s Wholesale Club’s shares trade in-line with the industry mean. We think this valuation reflects the company’s solid business prospects and above trend growth in the near term. The stock currently trades at 15.0x our fiscal year 2008 EPS estimate and 14.8x our fiscal year 2009 EPS estimate. This valuation is discounting a strong performance for the next few quarters. Our target price is $34 or 15x our fiscal year 2009 EPS estimate.

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