On Wednesday, JPMorgan made a bullish move on AutoZone (NYSE:AZO), raising the price target on the automotive parts retailer's stock to $3,200 from the previous target of $3,000. The firm maintained its Overweight rating on the shares, indicating a positive outlook on the company's performance.
The increase in price target comes after AutoZone reported a modest 0.3% rise in domestic comparable sales, which was in line with JPMorgan's projections but fell short of the broader market expectation of a 1.2% increase. The results reflected a challenging comparison due to unfavorable December weather and the holiday calendar. AutoZone's significant Do-It-Yourself (DIY) segment, which makes up 70% of its business, was particularly impacted, contrasting with competitors like O'Reilly (NASDAQ:ORLY) Automotive, which has a less than 55% DIY mix.
JPMorgan highlighted that AutoZone's gross margin outperformed, exceeding consensus estimates by 90 basis points, driven primarily by merchandise margin improvements and the industry's strong pricing power. The firm anticipates that the gross margin performance will remain robust throughout the year, despite potential headwinds from LIFO accounting practices toward the year's end.
The optimism also stems from the expectation that current headwinds, such as the deferral of maintenance, will ease and pent-up demand will materialize. This, combined with the momentum from AutoZone's various initiatives, should contribute positively to the company's future performance.
JPMorgan's analysis suggests that AutoZone is part of a broader trend where secondary market players are catching up to industry leaders, which are trading at or above historical averages. This market adjustment is seen as a search for reasonably priced assets in the current economic climate. Based on these factors, JPMorgan has raised its fiscal year 2024-2025 estimates for AutoZone, leading to the increased price target of $3,200, which is based on a 19x P/E multiple on the firm's fiscal year 2025 forecasts.
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