Redburn Atlantic downgraded Costco Wholesale Corporation on Tuesday due to concerns about the high stock valuation.
Costco analyst Daniela Nedialkova lowered her previous Buy rating to Neutral and simultaneously increased the price target from $860 to $890.
Costco is a quality company that has a strong business model. However, the current value of its stock may limit its upside potential.
Costco’s price-to earnings (P/E ratio) for 2025 is at a high 50x. This raises concerns about the changing risk-reward balance, especially since many growth catalysts have already been priced in.
Costco August Sales Data: What do they say?
Costco has been performing well, as evidenced by recent sales figures. The company reported a 7.1% rise in August 2024 total sales, which was boosted by a 5.0% increase in comparable sales.
Even after adjusting for fluctuations in gas prices and exchange rates, sales comparables were up 7.1%.
For the third month in a row, non-food products, such as jewelry, gift certificates, and sporting items, have seen a growth of low double digits.
The e-commerce sector continues to show positive signs, as it has seen a 16,2% increase year over year in sales comparables for the 52-week period ending on September 1, 2024.
Jefferies analysts and Oppenheimer analysts have noted Costco’s excellent merchandising and value proposition as contributing factors to its strong sales momentum.
Memberships grew by 9.4% in the third quarter of 2024, compared to Q3 2018.
Costco has shown its financial strength by maintaining and expanding margins during the fourth quarter, even if it was only slightly.
The company’s margins have dipped slightly from 11,04 % in the first quarter to 10,84 % in the third, reflecting both a slowing of economic growth and financial constraints among consumers.
Even in an environment of high interest rates, however, brand loyalty and the strength of the company’s customer base continue to be a major factor supporting its financial performance.
Costco Q4 Earnings Preview
Analysts are optimistic about Costco’s earnings for Q4 of 2024.
Costco is expected to post earnings per share of $5.06, based on revenue of $79.98 Billion. This compares with $4.87 on $78.94 Billion in the previous quarter.
In the last 90 days, thirteen out of fourteen analysts who cover the stock revised their forecasts upwards. This reflects the expectation of a continued high performance.
Costco’s P/E is higher today than it was in the past and compared to its peers.
The stock is priced perfectly at 56x earnings forward, with little room for errors.
The high valuation of Costco could lead to a downward correction, particularly if the broader markets deteriorate and if future earnings do not meet expectations.
Costco could also be affected by the impact of weight-loss medications that are decreasing food demand in the retail industry, especially given the reliance it has on bulk food sales.
Costco has several positive factors that continue to drive its growth, including the strong loyalty of customers, an exclusive treasure-hunt shopping experience and a robust membership expansion.
The stock may not have much upside in the near term, given its stretched valuation and the mounting risks, especially with rising interest rates, and an economy that could slow down.
Analysts also point out that a possible catalyst could be a split in the shares, though the effect of this on the valuation of the stock and its performance is still uncertain.
After establishing the basic factors and addressing valuation issues, it is time to examine how the price of the stock is being affected by these elements.
We’ll look at the technical indicators and see if they support or oppose the cautious view on Costco that Redburn Atlantic has taken.
Costco Stock Technical Analysis
Costco stock returned over sixfold in the past 10 years. The stock is also on a strong upward trend, with a rise of over 60% in the last year.
If you take these factors into consideration, it is not necessary to even look at charts in order to determine that the stock will be bullish over a wide range of timeframes.
TradingView
Investors who are yet to buy the stock should not hurry and purchase it now, as the price has been trading at a resistance level of $900 for the last few days.
In addition, following such an aggressive move in the last year, it is best to wait for the price of the stock to retrace before investing.
Investors should look for the lowest price in this range if the stock does not rise above $900 within the next few months.
It would not be wise for traders with a negative outlook to start a short at the current level despite resistance above $900. Only if the price falls below either its 50-day average or recent swing low of $793, should a short position be considered.
The post Redburn Atlantic downgrades Costco over valuation concerns – should you sell this stock? This post may change as new information unfolds
