A couple of analysts have downgraded Costco stock

Costco’s (COST) solid sales and earnings growth have driven its stock higher so far this year. Costco stock is up 26.1% YTD (year-to-date) as of September 21. Given the recent uptrend, analysts believe that Costco stock is fully priced at this moment. A couple of analysts have recently downgraded its stock, citing its high valuation.

Analyst Karen Short of Barclays has downgraded Costco to an “equal weight” from an “overweight” rating, stating that the company’s valuation looks rich, and suggests buying the stock at a pullback. Meanwhile, analyst Edward Kelly of Wells Fargo has downgraded his rating on Costco stock to a “market perform” from an “outperform” for similar reasons.

Will Costco’s Valuation Stall the Rally in Its Stock?

Costco stock is trading at 33.0x its fiscal 2018 estimated EPS of $7.11 and 30.3x its fiscal 2020 estimated EPS of $7.75. Both these values look expensive based on the company’s projected growth rates of 22.2% and 9.0%, respectively.

Despite the recent downgrades, the majority of Wall Street analysts maintain “buy” ratings on Costco stock. Meanwhile, analysts maintain mostly “holds” on Target (TGT) and Walmart (WMT) stock.

Near-term results to remain strong

While analysts expect Costco’s growth rate to slow down in fiscal 2020 as the company faces tough YoY (year-over-year) comparisons and reaps the benefits of tax reforms, they remain upbeat about its near-term prospects.

Analysts expect Costco’s top and bottom lines to mark double-digit growth in the fiscal fourth quarter. The company’s impressive membership renewal rates, continued investment in price, closure of 63 Sam’s Club locations, and lower effective tax rate to continue to drive its sales and earnings at a brisk pace.

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