Bernstein: Costco Overvalued By 'Pretty Much Every Measure'

Costco Wholesale Corporation COST awarded investors over the past few years, but is now overvalued by "pretty much every measure," according to Bernstein.

The Analyst

Bernstein's Brandon Fletcher downgraded Costco from Market Perform to Underperform with a price target lifted from $220 to $230.

The Thesis

Costco's stock multiple expanded over the years but little has changed in the underlying story to warrant buying the stock today, Fletcher wrote in a note. Specifically, the stock's forward P/E (next 12 months) expanded from around 21 in 2009 to 32.9 times today and is five turns higher than the research firm's fundamentals analysis implies.

Compared to its peers, the stock's forward P/E at 2.57 times is notably above the retail peer average of around 1.45 times.

Investors typically argued a premium multiple is warranted as Costco offers a combination of consistent growth and a defensive reputation, the analyst said. However, EPS growth has not only been inconsistent over the years but will likely remain erratic moving forward.

By contrast, dividend growth has been more consistent as of late but even assuming a path of stable growth, the stock's Price/NTM dividend per share multiple of 127 times is above the historical average of 89 times.

"With fundamentals that we think are being overestimated and all valuation metrics pointing toward overvaluation, even in aggressive growth scenarios, we conclude that COST is at risk of a larger correction in price over the next 12 months," Fletcher wrote in the note.

Price Action

Shares of Costco traded lower by 2.44% Thursday morning to $285.29.

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Photo credit: Tony Webster, via Wikimedia Commons