AutoZone Upgraded Upon Increased Analyst Faith
AutoZone (NYSE: AZO), an automotive accessory retailer, has seemingly left the competition to eat its dust as Deutsche Bank upgraded the company from Hold to Buy this morning, and increased its price target by $40. The move was made for several reasons, but it appears that economic concerns battling against new car sales is one of the driving factors behind the advancement.
Operating nearly 5,000 stores throughout the United States alone, AutoZone has sparked the interest of analysts with its compelling growth story. According to Deutsche Bank, AutoZone currently has the best opportunity for further share gains in the commercial segment, which results in industry leading sales trends. This, coupled with increasing operating margins, has led the firm to believe that investors are in a great position to purchase shares.
However, interested parties may want to hold off as Deutsche Bank admits its estimates are above consensus. AutoZone's commercial penetration is only at 15 percent, in comparison to Advance Auto Parts (NYSE: AAP) with 38 percent and O'Reilly Automotive (NASDAQ: ORLY) with 40 percent. However, AutoZone's position will likely change following today's actions.
"But, 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.
Most recently, Advance Auto Parts reported its first quarter earnings on May 17, with net income of $133.6 million. The company's EPS of $1.79 was up from the year prior'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's 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.
On Tuesday afternoon, AutoZone traded up around .35%, near $376.36, while Advance Auto Parts was down approximately 2%, trading around $65.13.
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