Oppenheimer Sees 'Bright Spot' Emerging In Auto Parts Retailers

Oppenheimer raised its rating on O'Reilly Automotive Inc

to Outperform from Perform and raised the price target of AutoZone, Inc.

shares by $100 to $900, saying that it sees the auto parts retail space represents a clear "bright spot" in the current environment. According to Oppenheimer, key factors helping the sector include: a) higher miles driven; b) a still aging US auto fleet; and c) improving prospects for lower-income consumers. Importantly, it views this climate is likely to persist, even if gas prices further stabilize. Analysts including Brian Nagel said over the past several years, the installed base of vehicles in the US has continued to age even as new car sales have climbed back toward all-time highs, implying less scrappage of older autos. "We believe that this shifting dynamic owes to improved manufacturing of cars and represents a key positive for the Auto Parts Retail sector, which tends to focus on vehicles 5-7 years and older," Nagel wrote in a note to clients. The analyst set a $300 price target on ORLY shares, implying an upside potential of about 12 percent from current levels. He also reiterated his Outperform rating on AZO, whose $900 price target suggests an upside of about 15 percent from current prices. A key component of Nagel's now even more upbeat stance on the sector is that the now higher multiples at which the shares of leading chains trade will hold as continued solid fundamentals will further bolster the "safe haven" status of the group in the minds of investors. Comp sales at leading aftermarket auto parts chains, such as AutoZone and O'Reilly, topped Street forecasts and/or guidance provided by management. According to Nagel, comp sales growth at O'Reilly Auto is expected to track +4-6% through 2016, with potential for upside to figures. Meanwhile, the analyst forecast more modest, but still solid comp sales growth of +1-3% at AutoZone over the next several quarters as the chain also capitalizes upon solid Industry fundamentals and begins to reap the benefits of its inventory and supply chain initiatives. Cash generation and the distribution of excess capital are set to remain key components of the operating models of AZO and ORLY, with free cash flow at the chains expected to amount to $1 billion to $1.2 billion annually for at least the next few years. However, the analyst noted that the Perform-rated Advance Auto Parts, Inc.

continues to struggle meaningfully with the integration of General Parts, on the heels of years of less than-perfect execution. "While optimistic that AAP should eventually "right the ship," we expect trends at the chain to languish further near term. ORLY in particular is well positioned to capture share from a waffling AAP," Nagel wrote in a note to clients. In addition, lower gas prices have been positive for auto parts retail sector. But, the analyst noted that the recent rebound in oil prices "seems healthy for the US macro climate overall, and the rebound is still sufficiently muted as not to impact trends in the Auto Parts Retail sector or investor sentiment toward the group."