Autozone Inc (NYSE:AZO) stock fell 1.64% (As on June 20, 1:22:39 AM UTC-4, Source: Google Finance) after the company got upgraded by UBS to Buy from Neutral with a price target of $2,900, up from $2,800. The analyst thinks the current valuation has created an attractive buying opportunity. Analysts told investors in a note that AZO currently appears mispriced relative to its commercial opportunity. The analyst has upgraded AZO from Neutral to Buy as they think the current valuation has created an attractive buying 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. They stated that as AZO shows evidence it can successfully navigate through these risks, its shares could rally.
Over time, the analyst believe AZO’s DIFM growth will re-accelerate while its DIY growth will be steady amid the uncertain macro backdrop. Ultimately, this should influence a return to a premium valuation multiple of 19x. Thus, they see ~30% potential upside to the current price & favorable 2.7:1 upside/ downside skew. 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).
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, UBS think the competitive dynamics will shift more share to AZO as others struggle to serve the large chains effectively. Founded in 1979, Memphis, Tennessee-based AutoZone has 7,014 stores across the US, Mexico, Puerto Rico, Brazil, and the US Virgin Islands.
Meanwhile, AZO has reported net sales of $4.1 billion for its third quarter ended May 6, 2023, an increase of 5.8% from the third quarter of fiscal 2022. Domestic same store sales, or sales for stores open at least one year, increased 1.9% for the quarter.