Sterne Agee Initiates Coverage On Aftermarket Auto Parts Retailers

Sterne Agee initiated coverage on aftermarket auto parts retailers in a report issued Thursday and named Advance Auto Parts, Inc. AAP its top pick.

According to analysts Ali Faghri and Michael Ward, “The aftermarket auto parts group offers positive industry demand tailwinds, attractive valuations, e-commerce protection and a high degree of fragmentation with continued market consolidation opportunities.

“Aftermarket auto parts retailing is a unique sector within retailing with a number of companies that co-exist both productively and profitably. The group has been one of the best performing sectors in retailing over the past several years.”

Faghri concluded that the “secular shift to the faster growing and larger Do-It-For-Me (DIFM) segment (which serves professional mechanics and repair shops) favors companies with a strong commercial focus.

“Given the significant distribution investments required to compete on delivery speed, frequency and parts availability, we prefer companies with consistent cash flow generation and strong balance sheets to drive market share gains as the industry consolidates.”

Below are the firms ratings and price targets for the group.

Advance Auto Parts, Inc. - Buy, $165 price target

[Its] acquisition of General Parts International in early 2014 presents an opportunity for earnings accretion as the company executes on integration. Even after a significant move post the deal, we see upside to shares as strong free cash flow should allow the company to quickly deleverage and resume share repurchases.”

AutoZone, Inc. AZO - Underperform, $550 price target

“[H]as been the leader in the auto parts retailing industry for the past two decades with a consistent history of above average financial performance and shareholder returns. In the near-term, we believe the company will have a difficult time maintaining financial returns given substantial commercial investments.”

Genuine Parts Company GPC - Neutral, no price target

“[H]as long been considered among the blue chip companies in the automotive retailing sector. GPC's leading brand, historical performance, solid balance sheet, and consistent returns to shareholders have traditionally been cited as reasons to justify a premium multiple for the stock. In the near term, we believe the market has largely discounted our 2015 assumptions.”

O'Reilly Automotive Inc ORLY - Neutral, no price target

“[B]alanced dual market strategy, best in class distribution and new market expansion opportunities position the company to outpace the peer group and deliver double digit earnings growth into 2016. Additionally, ORLY’s increasing payables ratio and incremental leverage should drive cash flows for store and distribution center growth, share repurchases and strategic acquisitions. In the near-term, we believe the market has largely discounted our 2015 assumptions.”

The firm’s top pick, Advance Auto Parts, Inc. closed at $146.00 Thursday, down 0.18 percent.