Wells Fargo Downgrades Costco, Says Shares Are Too Expensive Given The ‘Hurdles’ Ahead

Author: Smith Clarkson

Edward Kelly, a senior equity analyst at Wells Fargo, has reduced Costco stock from overweight to equal weight, citing the oncoming “hurdles” the company is set to face in the coming months.

In this article, we’ll cover Mr. Kelly’s anticipations, his reasons to back them up, and how Costco’s near-term outlook shapes up.

Let’s get started. 

Wells Fargo Analyst Devalues Costco, Says Shares Are Too Expensive Given The ‘Hurdles’ Ahead

“Costcos’ stock is too expensive considering the hurdles it’s set to face in the next few months.” “COST is still a high-quality buy, but moving forward, we’ve considered the many headwinds in this rich multiple stock’s path,” said Edward Kelly as he reclassified the shares from overweight to equal weight on Monday.

Mr. Kelly also adjusted his price target from $600 a share to $490 a share, reminding his clients in the letter that investors are paying huge premiums for the stock. He further added that Costco, like every other retailer, isn’t invulnerable to food disinflation and falling consumer demand that will indeed halt comps moving forward.

“We are becoming increasingly worried about how staple retail stocks respond to halting top-line momentum, and COST bearing more exposure to this problem considering its relatively-high multiple,” he said.

Now let’s understand the factors behind Costo’s forecasted hurdles. 

What’s Causing The Hurdles

Costco has experienced exponential growth over the previous years. Company progress mainly resulted from the increasing inflation and the pandemic’s aftermath, which saw customers seeking its value. 

But those tailwinds look like they are already coming to an end. 

Mr. Kelly predicts currency pressures and increasing fuel risks to befall the retailer’s fiscal path, which may cause headwinds to earnings reaching 3% and 5%.

Fuel margins soared past record levels over the last few quarters, making Mr. Kelly’s stock analysis reasonable. Wells Fargo’s current price target predicts that shares will remain range bound in the next two quarters, having dropped over 14% since January.

If momentum was to be slower than expected, Kelly anticipates a 15% to 20% downside risk to COST.

“We are also watching how Costco follows through the recent record-breaking EBIT margin expansion considering its usual stability and customers-first brand reputation.”

“Rounding up, we analyze more risk to consensus statistics in the long-run than upwards potential, not really a good position for COST given its current valuation.”

Costco Stock Update

Costco shares have fallen by 1.6 in premarket trades. Currently, the stock price is down by 14.4% since last year and 20% on the S&P 500 index.

Summary

• Wells Fargo analyst Edward Kelly downgrades Costco over fears of oncoming headwinds.
• Costco has enjoyed historic growth over the past few years, resulting from the pandemic and rising global inflation.
• However, these tailwinds keeping Costco’s numbers favorable are beginning to dip.
• Furthermore, consumer spending is falling, and currency exposure and fuel margins may soon impact the company’s earnings.
• Costco remains a notable buy, despite his predictions, to hold as long-term forecasts expect the stock value to jump over $900 by 2025.

Final Word

Investors looking to make an informed decision before heading into stocks should research the company and how they can profit from it thoroughly. Also, you should consult a financial expert before making an investment decision.