Don't Forget About Aftermarket Auto Stocks

• Analysts at Jefferies initiated coverage of the Automotive Aftermarket sector.
• Secular tailwinds favor "continued industry expansion."
• O'Reilly Automotive Inc ORLY was singled out as having comps that "significantly" outpace its peers.

In a report published Wednesday, Jefferies analyst Bret Jordan initiated coverage of the Automotive Aftermarket sector – an often overlooked segment that has offered investors "significant" outperformance over the years.

According to Jordan, the Jefferies Automotive Aftermarket Index has offered investors a 23 percent compounded annual return over a 10-year trailing period, outperforming the 12 percent compounded annual return for the S&P 500.

Jordan said that the aftermarket is expected to grow at a 2.4 percent compounded annual growth rate through the end of the decade given supportive secular tailwinds including improving vehicle quality and lifecycle and lower fuel prices. Moreover, the industry will also benefit from improvements in online shopping distribution networks (i.e timely parts can be delivered more rapidly) while the industry has "limited" exposure to foreign currency volatility.

Jordan highlighted O'Reilly Automotive as a standout in the group. The company is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories. According to the analyst, the company has a market leading distribution network and a leader in parts fulfillment. In addition, the company's 5.6 percent average comp (2010-present) "significantly" its peers, including Advance Auto Parts, Inc. AAP's average comp of 2.0 percent over the same time period and AutoZone, Inc. AZO's 3.7 percent.

Initiation Coverage And Price Targets

Shares of Advance Auto Parts were initiated with a Hold rating and $170 price target due to "heightened integration risk" following its acquisition of General Parts International which happens to be the "largest industry acquisition in two decades."

Shares of AutoZone were initiated with a Hold rating and $740 price target as the stock is already trading at a premium multiple versus its peers.

Shares of Genuine Parts Company GPC were initiated at Buy with a $95 price target as the company stands to gain share in the commercial and DIY segments through its NAPA Auto Parts segment.

Shares of Monro Muffler Brake Inc MNRO were initiated at Buy with a $75 price target as the company is likely to be active on the M&A front to improve its operation leverage. At the same time, the company will benefit from a rebound in tire sales that will drive comp expansion.

Shares of O'Reilly Automotive were initiated at Buy with a $290 price target as the company is the "only geographic expansion story" among retailers that can provide "another leg of growth."

Finally, shares of Pep Boys-Manny Moe and Jack PBY were initiated at Hold with a $12 price target given a "limited visibility" to longer-term earnings following a new management team and an ongoing strategic review.