AutoZone Is Citi's Top Auto Part Retail Pick

In a report published Monday, Citi analyst Kate McShane maintained a Top Pick rating on AutoZone, Inc. AZO, saying that the company was their “best non-consensus call” and their “most favored idea in the auto part retail space.”

AutoZone’s shares have risen over the past 9 months, and the stock is currently trading at a 14 percent premium to its 3-year average. “We think we are at a point in the story where we will start to see accelerated top- and bottom-line growth based on strong industry fundamentals, successful investment in the commercial segment, continued strength in DIY and a strong management of costs,” analyst Kate McShane said.

In the report Citi noted that favorable industry factors as:

• The average age of cars has reached 11.5 years, which is an all-time high. Cars that are older than 11 constitute 47 percent of vehicles in operation
• Scrappage rates continued to decline
• The auto repair shop count and sales per auto repair shop continue to rise

The Auto Care Association raised its auto part aftermarket sales projection for 2015-2017 by 1.3 percent for DIFM and 2.3 percent for DIY. “The raise in forecasts is encouraging considering that the industry also grew 100 bps ahead of expectations at +3.8% y/y in 2014,” McShane wrote.

McShane expects the company’s DIFM programs that are 4 years and younger to continue to boost DIFM sales, “as the newer programs comp aggressively during the ramp-up period followed by still solid MSD growth.”

“We expect AZO to manage through the increasing sales mix towards commercial sales through leveraging expenses off of higher sales,” the report added.