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Why Wells Fargo Downgraded Costco Stock

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Costco stock seems fully priced

Wells Fargo downgraded Costco (COST) stock to “market perform” from “outperform” due to the company’s high valuation multiple. Wells Fargo analyst Edward Kelly stated that Costco shares have soared to record highs and seem fully priced. In Will Valuations Stall Uptrend in COST, WMT, and TGT?, we underscored the fact that Costco, Target (TGT), and Walmart (WMT) look pricey given the recent run in their stock prices. Following the downgrade, Costco shares were trading 1.9% lower on September 14.

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Valuation

Costco stock is trading at 34.0x the fiscal 2018 estimated EPS of $7.10 and at 31.1x the fiscal 2019 estimated earnings of $7.75. Both of the estimates look expensive with the projected growth rates of 22.0% and 9.2%, respectively, during those periods. Costco stock is also trading at a significant premium to its four-year historical average multiple.

Costco’s fundamentals remain strong. The improved macro backdrop will likely drive the company’s near-term sales and earnings growth rate. However, Costco’s high valuation and the anticipated decline in the growth rate in fiscal 2019 could restrict the upside.

Among the 28 analysts providing recommendations on Costco stock, 19 analysts maintained a “buy” rating, while nine analysts recommended a “hold.” Analysts have a target price of $240.86 per share on Costco stock, which is almost at par with its closing price on September 13.

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