Morgan Stanley Upgrades AutoZone (AZO) to Overweight; Analyst Highlights Number of Vehicles Over 7 Years Old

September 27, 2016 6:38 AM EDT
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Price: $738.43 -0.12%

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    14 Buy, 14 Hold, 0 Sell

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(Updated - September 27, 2016 11:31 AM EDT)

Morgan Stanley upgraded AutoZone (NYSE: AZO) from Equalweight to Overweight with a price target of $840.00 (from $820.00). O'Reilly Automotive (NASDAQ: ORLY) was maintained a Overweight and its price target was raised to $315 (from $300). Analyst Simeon Gutma thinks a positive inflection is on the horizon given the number of vehicles that are over seven years old. Gutma also described AutoZone's valuation as "undemanding."

"We are upgrading AZO to OW as we see multiple paths for upside, which more than outweigh the risks for this consistent bellwether. Chief among them is a positive inflection in the 7 year and older vehicle population, which is strongly correlated to industry/AZO's same store sales," said Gutma. "As long as vehicle scrappage rates remain low, industry growth could accelerate by 200+ bps in 2017."

The analyst continued, "Auto parts sales are also poised to benefit in the near term from cold winter weather, still healthy miles driven, and possible inflation. As a result of these secular tailwinds, we raise our PTs on AZO to $840 from $820 and ORLY to $315 from $300 (~1112% upside) based on slight increases to our target multiples, reflecting our incrementally positive view that near-term comps could meet or exceed Street expectations across the DIY auto space."

Gutma added, "Besides these potential top-line drivers, AZO's valuation is undemanding, trading at ~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". Finally, the stock is not well liked at the moment, with high short interest (8%) over e-commerce concerns and worries over slowing commercial (Do It For Me) sales. While these risks are valid, we believe improving top-line growth should put these concerns to rest for the time being."

For an analyst ratings summary and ratings history on AutoZone click here. For more ratings news on AutoZone click here.

Shares of AutoZone closed at $758.88 yesterday.

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