Costco Has More Risk Than Upside, Wells Fargo Says In Downgrade

Despite Costco Wholesale Corporation COSTCO’s strong performance this year, Wells Fargo said the success represents a plateau for the warehouse club. 

The Analyst

Wells Fargo analyst Edward Kelly downgraded Costco from Outperform to Market Perform and maintained a $235 price target.

The Thesis

Costco's performance was driven by top-line growth that surpassed historical levels, as well as an increase in comps from 5.1 percent during 2011-2016 to 5.7 percent in 2017 and then to a current 7.2 percent, Kelly said in the Friday downgrade note. (See his track record here.) 

“The company has had numerous drivers of growth, including material consumer stimulus from tax reform (we believe its customer base has seen the largest benefit so far in 2018), the closure of 63 Sam’s Club stores (early 2018), outsized returns on the reinvestment of MFI and lower corporate tax rates (2017/2018), and sustained tailwinds from the launch of its new Visa card.”

Some company highlights include the improvement of the digital narrative, particularly in regards to e-commerce, as well as continued solid growth, Kelly said. While this does provide a good story, it is not “peak valuation good," he said. 

“COST trades at 31x NTM EPS and 17x EBITDA, its highest level in almost 20 years and 40-60-percent above its post-Great Recession average. It’s also at or above peak valuation relative to the market and consumer indexes. We see more risk than upside to valuation over time.”

Price Action

Costco shares were down 2.06 percent at $236.31 at the time of publication Friday. 

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