Goldman Sachs Upgrades AutoZone to Buy; Raises Price Target
Shares of AutoZone (NYSE: AZO) are trading higher on Tuesday despite a broad market sell-off. The stock has added 1.34% to $383.79 after Goldman Sachs (NYSE: GS) upgraded the name to its Conviction Buy list and raised its price target. Previously, the firm had a price target of $405 on AZO shares which has been raised to $435. Goldman analysts cited AZO's commercial ramp, capital investment, and valuation in upgrading the stock.
They 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 AZO is set to beat consensus earnings and revenue estimates for the May quarter on higher sales numbers. AutoZone is set to release its next quarterly earnings results on May 22 prior to the opening bell. The key risks that Goldman identifies to its recommendation is a potential macro slowdown and higher gas prices.
They wrote, "the auto parts sector is in the latter stages of a 'supercycle' associated with 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. Over the last year, AZO has risen almost 40%. Over the last 5 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."
Currently, AZO shares trade at a trailing P/E of 17.91, a forward P/E of 14.22, and a PEG ratio of 1.13. Given the company's superior operating track record and history of shareholder value creation, AZO 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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