Costco (NASDAQ:COST) has consistently delivered solid comparable sales this year despite food and fuel inflation, excess inventory issues, and macro weakness. Its strong growth has often overshadowed valuation concerns. However, Wells Fargo analyst Edward Kelly sees challenges ahead for Costco, which is a concern for Costco’s premium valuation. Kelly downgraded COST stock to Hold from Buy and lowered his price target to $490.
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Kelly expects Costco’s comparable sales to moderate as it faces tough year-over-year comparisons ahead. Further, pressure on consumer spending amid macro headwinds, the pullback in fuel margins, and adverse currency movement will likely pose challenges for Costco.
Kelly’s price target of $490 implies a multiple of 34 to his 2023 EPS estimate. In comparison, Walmart (NYSE:WMT) and BJ’s Wholesale Club Holdings (NYSE:BJ) are trading at a price-to-earnings multiple of 21.6 and 28.1, respectively. Hence, Costco’s premium valuation does not seem very attractive at the current levels versus its peers. Also, the anticipated slowdown in growth could limit the upside in its stock price.
What is the Prediction for Costco Stock?
While Kelly downgraded Costco stock to Hold, most Wall Street analysts recommend a Buy. It has received 15 Buy and four Hold recommendations for a Strong Buy consensus rating on TipRanks. Meanwhile, analysts’ average price target of $552.47 implies 13.1% upside potential.
Bottom Line
Costco has historically traded at a premium to its peers owing to its high growth and ability to drive comparable sales. However, a slowdown in growth will act as a dampener. Nevertheless, its high membership renewal rates (stood at 92.6% in the U.S. and Canada at the end of Q4), increase in the membership fee, and value pricing will support its financials.
Jefferies analyst Corey Tarlowe is bullish about Costco stock. The analyst said, “Costco’s model demonstrates its resiliency as members continue to spend.” Tarlowe termed COST a “top pick,” and his price target of $610 is based on the “F’24 EPS of $17.31.”
Additionally, hedge funds have accumulated COST stock. Hedge funds bought 1.2M COST stock last quarter. Moreover, it scores a nine out of 10 on TipRanks’ Smart Score system, implying Outperformance.
