Analysts at UBS have upgraded AutoZone Inc from Neutral to Buy based on their hunch that the underappreciated company could rally hard if it successfully navigates some risks.
In a note to clients, UBS also noted that they were upgrading AutoZone as they felt the current valuation has created an “attractive buying opportunity.” The price target also got upgraded to $2,900 from $2,800 based on the firm's higher growth forecast. The share currently trades at around $2,467.
“AZO appears mispriced relative to its commercial opportunity…The multiple has compressed in response to the perception that AZO’s commercial prospects have dimmed and the fear that the sector will see more price competition,” said the UBS analysts.
“As AZO shows evidence that it can successfully navigate through these risks, we believe its shares could rally,” it added.
Over time, UBS said the American retailer of aftermarket automotive parts and accessories, could see growth pick up nicely.
“AutoZone’s DIFM (Do It For Me marketing) growth will re-accelerate while its do-it-yourself (DIY) growth will be steady amid the uncertain macro backdrop,” said the analysts.
"Ultimately, this should influence a return to a premium valuation multiple of 19x. Thus, we see ~30% potential upside to the current price & favorable 2.7:1 upside/downside skew.”
UBS noted that the competitive dynamics in the aftermarket favor AutoZone.
“Importantly, the parts component of the approximately $240bn DIFM segment of the aftermarket remains highly fragmented (~19% of the share is held by AZO, AAP, ORLY & NAPA),” said the analysts.
“Yet, the customer base of this segment is becoming more consolidated. A growing share of the ~240k auto repair centers in the US are being controlled by larger players. This should accelerate as cars become more complex…As this happens, it makes it harder to profitably serve these players.”
However, UBS believes that AutoZone is an outlier as it stands in “a good spot to do so by virtue of its: healthy DIY business” that has strong margins. The analysts also noted the high penetration of AutoZone’s private label (PL) products that have increasingly been well-received by commercial customers and its growing base of distribution assets.
“Further, we think the competitive dynamics will shift more share to AZO as others struggle to serve the large chains effectively,” concluded UBS.
Founded in 1979, Memphis, Tennessee-based AutoZone has 7,014 stores across the US, Mexico, Puerto Rico, Brazil, and the US Virgin Islands.
Contact the author Uttara Choudhury at uttara@proactiveinvestors.com
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