Bank of America is bullish on auto-parts stocks.
“In light of the recent downturn in stocks across our hard-line retail coverage, we reassess valuations and growth outlooks for the auto-parts retail stocks,” the investment firm's analysts wrote in a commentary.
The stocks are “often considered more defensive, ‘staples-like’ stocks within the consumer discretionary sector.”
Advance Auto Parts (AAP) remains Bank of America's top pick in auto-parts retail. It’s the third largest company in the industry by 2021 revenue after AutoZone (AZO) and O’Reilly Automotive (ORLY).
The company has “the highest exposure to the faster-growing professional auto service channel -- at about 60% of its customer base versus 45% for ORLY and 20% for AZO,” the analysts said.
“AAP is also the least expensive of the three at a one-year forward price-earnings" multiple of 13.9, versus AZO at 16.3 and ORLY at 17.4 based "on consensus estimates.”
Advance's Growth Outlook
Further, “we estimate AAP’s earnings per share grow at a compound annualized rate of 11.4% from 2022-24, while ORLY will grow about 9.9% and AZO about 8.6%,” Bank of America said.
Morningstar analyst Zain Akbari likes Advanced Auto Parts, too, giving it a narrow moat. The company “has long trailed its peers in profitability, with longstanding operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts,” he wrote in a commentary.
But “we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional and do-it-yourself segment exposure.”
O’Reilly’s Strength
Meanwhile, the Bank of America analysts upgraded O’Reilly to buy from neutral and Genuine Parts GPC to neutral from underperform.
O’Reilly is “a best-in-breed retailer, now at a discount,” they said. “At a one-year forward [price-to-earnings multiple], shares of ORLY are now trading at their cheapest valuation since March of 2020.”
Investors appear overly bearish for O’Reilly, the analysts said. They have a price target of $730, compared to a recent quote around $607. That indicates 20% potential upside.
Appropriate Price for GPC
Turning to Genuine Parts, Bank of America analysts said its valuation “no longer looks inflated, But we remain more cautious than on other stocks in our auto after-market coverage, as current valuation appears fair.”
The stock is now trading around GPC’s historical average [price-to-earnings multiple] of 16, “which we believe is appropriate given ongoing geopolitical risk in GPC’s European operations … and recession risk for GPC’s industrial segment,” the analysts said.
“However it should be noted that GPC’s business and geographic diversification (and its very long track record of dividend growth) make it unique among its peers.”
The analysts have a price target of $133, compared to a recent quote of $130.70
Meanwhile, among professional auto-services companies, the Bank of America analysts like Driven Brands (DRVN) and Mister Car Wash (MCW).
“Auto services spending has historically had a positive correlation with gas prices, which are likely to remain elevated in the medium term,” the analysts said.
