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Costco fundamentals are good, but they don't matter because of ‘Amazon fears,' analyst says

  • Costco shares were downgraded by BMO Capital Markets even after posting strong June sales figures last week; the analyst cites Amazon's growing grocery enterprise.
  • This is at least the third downgrade by a major Wall Street analyst since the Whole Foods deal.
  • Since Amazon's purchase of Whole Foods was announced in mid-June, Costco shares have fallen over 14 percent.

Costco shares were downgraded by BMO Capital Markets even after the company posted strong June sales figures last week, because the analyst believes the wholesale club's results don't matter in light of Amazon's growing grocery enterprise.

"Despite our continued belief that Costco's fundamental outlook remains strong," wrote BMO analyst Kelly Bania in Monday's report, "the weak stock reaction to Costco's impressive June comp figure (U.S. comps +6%) suggests that investor sentiment, driven by Amazon fears, may continue to overshadow strong fundamentals.

The analyst lowered the 12-month price target to $160, which is a 3.8 percent upside from Friday's close. BMO's previous target was $185, or a 20 percent upside. Shares fell around two percent during trading on Friday.

This is at least the third demotion for Costco in recent weeks. Last month, Deutsche Bank joined Goldman Sachs in lowering expectations for the wholesale firm, citing Amazon's recent deal for Whole Foods as a strong indication of upcoming competition. To date, no analysts recommend selling Costco shares.

Costco shares have climbed more than 80 percent in the last five years and have long outperformed other retailers throughout the rise of e-commerce retailing. But this luck may be running out.

Since Amazon's purchase of Whole Foods was announced in mid-June, Costco shares have fallen over 14 percent.

"Despite Costco's significant price gap to Amazon," continued BMO's Bania, "we believe near-term sentiment and fear of the long-term impact of Amazon on Costco's business (whether or not justified by fundamentals) could continue to create an overhang on COST shares."

According to the report, Costco's new valuation is based on 11x earnings before interest, tax, depreciation, and amortization (EBITDA) on BMO's 2019 fiscal year forecast. The latest prediction is a "modest" premium to the 10-year average.