Raymond James Upgrades Advanced Auto Parts (AAP) to Top Pick, Downgrades AutoZone (AZO) and O'Reilly Automotive (ORLY) in Quarterly Update For Car Parts Retail Sector

July 27, 2021 9:29 AM EDT
Get Alerts AAP Hot Sheet
Price: $214.09 +1.36%

Rating Summary:
    20 Buy, 17 Hold, 2 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 9 | Down: 0 | New: 19
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Raymond James analyst Bobby Griffin has made a series of calls in the auto parts retail sector as a part of the regular quarterly update.

The analyst upgraded Advances Auto Parts (NYSE: AAP) to ‘Strong Buy’ from ‘Outperform’ and raises the price target to $250.00 per share from $215.00.

“We believe that Advance has the greatest upside potential amongst the auto part retailers over the next twelve months. We have become increasingly optimistic on AAP’s risk/return profile and believe the industry, which is still highly fragmented, has opportunities to surprise on the upside through the remainder of CY21 and into CY22,” Griffin said in a note.

AAP is now the top pick in this industry.

“AAP's turnaround efforts are gaining steam and should lead to incrementally better results going forward. In particular, investors have awaited several years for this turnaround story to come to fruition, and we are now at the cusp of the margin unlock. Today, we are even more convinced that AAP is truly advancing to the next level via cross-banner replenishment, integrated WMS, and accelerated market share gains.”

On the other hand, the analyst downgraded AutoZone (NYSE: AZO) to “Outperform” from “Strong Buy” and hiked the price target to $1,750.00 per share from $1,700.00. The downgrade comes as a result of three factors:

1) current valuation that does not offer sizable multiple re-rating potential in the coming months (stock is now 4% below our prior price target),

2) challenging comp sales comparisons (more so than AAP and ORLY) due to greater DIY mix at 78% (compared to AAP/ORLY's 43/41%), and

3) lingering headline risk associated with pricing investments (commentary could further discourage some investors).

“While we understand the aforementioned concern given the benign pricing environment this sector is known for, we believe the incremental pricing investments should be viewed as transitory. We expect DIFM growing as a percentage of sales to be the primary driver of gross margin pressure going forward, which is to be followed by some headwinds on incremental pricing investments on the DIFM side through F2Q22 (early 2022). We remain mindful that inventory availability is historically the number one factor when pro garages consider making a purchase, not pricing,” Griffin stressed.

Still, the analyst is overall bullish on the Outperform-rated AZO as the business should continue to surprise on the upside.

Finally, Griffin downgraded O'Reilly Automotive (NASDAQ: ORLY) to “Market Perform” to reflect a high valuation that exceeded Raymond James’ former price target.

“While we continue to view ORLY as the best operator in the group, we see the benefits mostly reflected in its valuation. Over the prior three months, ORLY's shares increased 15%, above AAP's 11%, AZO's 8%, and S&P 500's 6%. As a result, ORLY's valuation is trading at a slight premium relative to history, trading at 21x our FY21 EPS estimate (versus its historical five-year multiple of 20x). Consequently, we have a difficult time finding potential upside for the stock, whether through a potential positive EPS surprise or through investor willingness to pay a higher valuation multiple,” the analyst concludes.

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