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Why Analysts Are Downgrading Costco Stock

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Dec. 4 2020, Updated 10:52 a.m. ET

Valuation is a concern

Costco (COST) has impressed with its financial performance so far this year. The company has outperformed its peers with sales and earnings growth rates in the double digits over the past several quarters.

Costco’s high membership renewal rates and continued investment in pricing to widen the value gap between itself and its competitors have made it immune to the growing threat from e-commerce companies. The company’s strong sales and lower effective tax rate are driving its bottom line, which is growing at a brisk pace.

Thanks to the company’s strong fundamentals, its stock has risen 24.7% so far this year. But has its stellar run made it uninvestable?

Recently, analyst Karen Short of Barclays downgraded Costco stock to an “equal weight” from an “overweight,” citing the company’s high valuation. Earlier, analyst Edward Kelly had downgraded Costco stock to a “market perform” from an “outperform” for similar reasons.

Despite downgrading Costco stock, Short likes Costco and has maintained its target price at $240. Moreover, the analyst suggests buying the stock at weakness. JPMorgan Chase has also increased its target price on Costco stock to $255 from $227.

Costco stock is trading at 32.7x its fiscal 2018 projected EPS of $7.10 and 29.9x its fiscal 2020 estimated EPS of $7.75. Both look expensive, with expected growth rates of 22.0% and 9.2%, respectively.

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Analysts’ ratings

Among the 28 analysts covering Costco stock, 18 have suggested “buys,” and ten have suggested “holds” on the stock. Analysts have a consensus target price of $241.48 on Costco, which indicates a potential upside of 4.1% based on its closing price of $232 on September 17.

In comparison, analysts maintain “hold” ratings on both Target (TGT) and Walmart (WMT).

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