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Costco Wholesale Corporation (COST) Is a Victim of Its Own Success

Wayne Duggan

After reporting consistent earnings and same-store sales beats throughout 2018 that have sent its stock up more than 30 percent on the year to new all-time highs, Costco Wholesale Corporation (NYSE: COST) may finally be becoming a victim of its own success.

Wells Fargo analyst Edward Kelly downgraded COST stock from "outperform" to "market perform" and says it will be difficult for Costco to impress the market at this point.

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Kelly says Costco's performance has been stellar in recent quarters, but it's unlikely the company will continue to deliver its impressive sales growth in 2019.

"While COST remains one of the highest-quality companies within consumer and near-term results should be positive, we can't help but think this may be as good as it gets," he says.

Once Costco's growth starts to decline, he says investors may realize the stock is trading at a valuation that is near its peak levels of the past two decades. In addition, he says there is no clear catalyst for sales growth in the near-term as Costco approaches difficult year-over-year comparisons starting in early 2019.

Costco closed 63 underperforming Sam's Club locations in January, a move which Kelly says has added nearly 1 percent to Costco's same-store sales growth year-to-date.

Once growth begins to slow, Kelly says investors will likely once again shift their attention to Costco's digital sales growth, which has slowed in recent quarters. He says Costco is well-positioned in the online space, but the company still lags its peer group and may need to invest further in its digital strategy in coming years.

Costco has been growing earnings by an average of 8 percent over the past five years, and Wells Fargo projects "high single digit" earnings growth and "mid-single digit" same-store sales growth will continue in the near term. However, Kelly says this bullish outlook seems to be fully priced into the stock at this point.

[See: 10 Investing Themes to Remember for 2018.]

"We view COST as a very good company that is putting up unsustainably strong top line results and getting rewarded with a historically peak valuation, which leaves little room for upside," he says.

So far, Costco is showing no signs of a slowdown in sales growth. The company reported a 9.2 percent increase in same-store sales in the month of August.

In addition to the "market perform" rating, Wells Fargo has a $235 price target for COST stock.



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