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AutoZone stock is “on sale,” analyst Greg Melich said in a research note.
Dreamstime
Investors have treated auto-parts retailers as a show-me story lately, but shares of
AutoZone
gained ground after one analyst argued that the stock has gotten too cheap.
Evercore ISI analyst Greg Melich upgraded AutoZone stock (ticker: AZO) to Outperform from In-Line in a research note published Monday. He raised his target for the price to $2,700 from $2,640, writing that the “perennial share gainer” in the attractive aftermarket retailing space is “on sale.”
The potential bargain comes after AutoZone reported a rare revenue miss in May. The stock was the worst performer in the S&P 500 the day of the report, and still hasn’t recovered to its pre-results level of more than $2,600.
Shares were up 1.6% to $2,400.20 in afternoon trading, while the
S&P 500
was 0.5% higher.
Melich said that while he doesn’t expect the company’s do-it-for-me car-repair business to return to double-digit growth in the near term, it doesn’t have to for the stock to rise. Revenue growth in the high single digits rate should be enough to allow AutoZone to deliver a same-store sales increase of around 3%, while the company’s margins should recover as its pricing continues to catch up with inflation, he says.
At the same time, AutoZone is still benefiting from factors that are helping auto- parts retailers in general. Inflation is leaving people with less money to spend on new cars, while vehicle prices are soaring. And people are generally more eager to repair their cars, rather than replace them, when the economic outlook is uncertain, as it is now.
Nonetheless, the past earnings season was difficult for the group, and not just because of AutoZone’s top-line disappointment. Stock in
O’Reilly Automotive
(ORLY) barely budged even though the company reported strong results, while
Advance Auto Parts
stock (AAP) imploded after the retailer disclosed disappointing results, lowered its forecasts for earnings and comparable-store sales, and slashed its dividend.
Advance Auto’s problems aside, the market’s response to the results may show that investors are concerned about how long the good times can keep rolling for auto-parts retailers. Both AutoZone and O’Reilly Automotive have gained more than 200% over the past five years, lapping the S&P 500’s climb some four times.
Yet analysts don’t appear worried. Nearly three-quarters of the 26 tracked by FactSet are bullish on AutoZone, with an average price target just above Melich’s at $2,785. Nearly two-thirds of those covering O’Reilly are also bullish, FactSet data show.
Write to Teresa Rivas at [email protected]
Source: https://www.barrons.com/articles/autozone-stock-earnings-upgrade-buy-fe7295cf?siteid=yhoof2&yptr=yahoo