Why Goldman likes AutoZone
Analysts said the company has enjoyed a 'supercycle' as stretched household budgets prevented new-car purchases.
Shares of AutoZone (AZO) traded slightly higher on Tuesday despite a broad market sell-off.
The stock got a boost after Goldman Sachs (GS) upgraded the name to its "conviction buy" list and raised its price target to $435 from $405. Goldman analysts cited AutoZone's commercial ramp, capital investment, and valuation in upgrading the stock.
AutoZone closed up nearly 1% to $381.89.
Goldman analysts also added that "this is the right kind of idea for new money after a period of sharp retail outperformance, with limited evidence of macro support for a sustained acceleration in spending." The analysts said that they think the auto parts retailer is set to beat consensus earnings and revenue estimates for the May quarter on higher sales numbers. AutoZone's next quarterly earnings are due May 22.
The key risks that Goldman identified were a potential macro slowdown and higher gas prices.
Analysts said the auto-parts sector is at the end of a "supercycle" related to consumer thrift and an aging fleet. "Torrid DIY market growth is unlikely to return, but we believe that this trend will fade gently rather than collapse. Higher gas prices are a challenge, but gas price increases are far smaller this year than last, and lower food prices help negate the impact of energy price increases on the low-end consumer."
AutoZone has been an extremely strong stock for years and remains in an impressive uptrend rising almost 40% in the last year. Over the last five years, the stock has added 200%. According to Goldman analysts, these trends are likely to continue as a result of the company's positioning in the auto parts retail sector.
They wrote, "we see an opportunity into the franchise that generates the strongest financial returns in hardlines retailing, at a reasonable price despite strong share price performance, with a visible sales catalyst spurring outsized sales growth and enhancing predictability of earnings growth."
Given the company's superior operating track record and history of shareholder value creation, AutoZone does not appear to be an expensive stock.
In fact, on an EV/EBITDA basis, AZO is one of the cheapest stocks in Goldman's coverage universe versus its 2012 return on capital. Analysts wrote that AZO is "inexpensive relative to returns, with few structural risks." Goldman now has the high price target on the Street for AZO shares. The median price target on the name is $405 with a low target of $350.
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Higher gas prices are a challenge, but gas price increases are far smaller this year than last, and lower food prices help negate the impact of energy price increases on the low-end consumer."
I want some of what this guy's taking. This whole article is a farce. I'm in the industry and the Zone as well as the other auto retailers are showing downturns at the moment , mainly due to much higher gas and food prices. Some big money fool at Goldman is trying to fleece the masses again before the market crashes this summer.
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The company is scrambling to protect its equities arm, which could face declining volume and revenue as competitors close the gap.
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