Morgan Stanley Upgrades AutoZone To Overweight, Sees 'Several Ways To Win'

Analyst Simeon Gutman pointed out that one of the key factors to warrant an upgrade is a favorable inflection in the vehicle population of above the seven-year-old category that helps the company's same store sales uptick. He believes that the industry could grow by two points in 2017 until the rates for vehicle scrappage remain low.

The brokerage expects cold weather and favorable inflation to be positive catalysts in the near term for auto parts sales gain. This is expected to boost DIY Auto SSS.

Related Link: Barclays Remains Buyers Of AutoZone Following Q4 Results

In a research note, Morgan Stanley said, "Besides these potential top-line drivers, AZO's valuation is undemanding, tradingat~16.5x'17e EPS and ~11x EBITDA, which is attractive relative to the business' low-DD EPS and HSD EBITDA growth. Near-term expectations have been appropriately set with management's characterization of Q4's sales pickup as 'modest.'"

The brokerage is not worried much about slowing commercial sales and e-commerce concerns, as top-line growth would outweigh the risk factors. The analyst pointed out that the "change in the seven-year-old vehicle cohort" is expected to add 400 basis points in the next couple of years' thus boosting SSS growth.

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