Are These Auto Parts Retailers Overvalued Right Now?

Morgan Stanley equity analyst Simeon Gutman has downgraded three auto parts retailers: Advance Auto Parts, Inc. AAP, AutoZone Inc. AZO and O’Reilly Automotive Inc ORLY.

What Happened: Gutman changed the ratings on all three stocks from Overweight to Equal-Weight while keeping the price targets for Advance Auto Parts and O’Reilly at $220 and $630, respectively, and tweaking the AutoZone price target from $1,640 to $1,650.

“Our downgrades are prompted by recalibrating our valuations and risk/rewards to anchor our target multiples to Morgan Stanley equity strategists' 19x forward target market multiple,” Gutman wrote. “Within this framework, the stocks screen as fairly valued.”

While Gutman admired “the defensive nature of the Auto Parts sector,” he added the three companies were “lapping a perfect storm of good weather, stimulus, and pandemic-induced wallet share shift in the medium term” which could complicate their “path for outperformance” — especially as all three were trading about their pre-pandemic absolute multiples.

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What Else Happened: In his view, Gutman continued, the three stocks were “trading at more of a discount (0.85x to the market),” although he added the stocks were “appropriately discounting some EV risk.”

Gutman also observed that demand in the auto parts retail market should continue to be vibrant, although he worried that supply was still constrained, thus resulting in an extended period “of elevated (but unsustainable) gross margins.” As a result, he forecast, a combination of healthy sales and gross margins would mean the companies’ 2021 earnings estimates “are still too low and this backdrop could persist into early ‘22.”

Trading Action: At last check Friday afternoon, Advance Auto Parts was trading at $204.20, with a 52-week range of $142.46 to $217.69.

AutoZone was trading at $1,551.68, with a 52-week range of $1,085.85 to $1,666.63.

O’Reilly was trading at $591.69, with a 52-week range of $424.03 to $621.73.

Photo: S. Hermann & F. Richter from Pixabay.