AutoZone upgraded on analyst optimism
The car-parts distributor is positioned well, especially as it turns its focus to improving commercial sales.
AutoZone (AZO), the auto-parts retailer operating nearly 5,000 stores throughout the United States alone, has sparked the interest of analysts with its compelling growth story.
Deutsche Bank upgraded the stock to "buy" from "hold" Tuesday and increased its price target by $40. The move was made for several reasons, but it appears that concern about slowing new-car sales is one of the driving factors behind the upgrade.
According to Deutsche Bank, AutoZone currently has the best opportunity for further share gains amongst its competitors. This, coupled with increasing operating margins, led analysts to believe that the stock is worthwhile.
However, interested parties may want to hold off, as Deutsche Bank admits its estimates are above consensus. AutoZone's commercial penetration -- sales to businesses in related industries -- is only at 15%, in comparison to Advance Auto Parts (AAP) with 38% and O'Reilly Automotive (ORLY) with 40%. However, AutoZone's position will likely change as it begins to emphasize commercial sales.
"As AZO accelerates the rollout of its commercial programs from 64% of stores today, compared to over 90% for competitors, we think they should maintain at least 20% growth in commercial, helping to lift comps over competitors," Deutsche Bank said in the report.
That's not to say that competition will not continue to be steady against AutoZone.
Piper Jaffray believes Advance Auto Parts' 12 month risk/reward is quite favorable despite the company's high second-quarter estimates. Overall, the specialty retailer of automotive aftermarket parts has a healthy industry background and operating margin expansion potential that leads analysts to view the valuation as highly attractive.
Advance Auto Parts reported a $134 million profit its first-quarter earnings on May 17. Earnings per share of $1.79 was up from the prior year's $1.35, further proving that AutoZone will not be able to leave the earnings racetrack unscathed.
While new car sales appear to be slowing, companies that replace older model parts have clearly continued to experience success. AutoZone and its competitors can rest easy knowing that their companies are revved up for likely prosperous fiscal years.
Shares of AutoZone fell by more than 5% in midday trading Wednesday to $356.51. The overall sector was down after O'Reilly Automotive cut its sales estimates for the current quarter.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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