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The firm’s proprietary survey underlined rational industry pricing dynamics, with the “Big Three” – O’Reilly Automotive (NASDAQ:ORLY), AutoZone (NYSE:AZO), and Advance Auto Parts (NYSE:AAP) – taking the lead based on inventory availability and speed.
The overall anticipation is a 3-4% normalized industry growth, substantial margins and dollar growth, growing ROIC, and notable shareholder returns, all driven by a blend of cyclical and counter-cyclical dynamics, increasing miles driven, parts complexity, and a growing and aging car parc, among other factors.
“Industry is rational as retailers are able to pass through input cost increases, while its non-discretionary nature results in low promotions,” mentioned the analysts at TD Cowen.
The firm initiated coverage on O’Reilly Automotive with an Outperform rating and a price target of $1,100.00, naming it as its top idea.
The analysts highlighted O’Reilly’s best-in-class execution and supply chain management, which is believed to position the company for taking a considerable DIFM (do-it-for-me) share and supporting DIY (do-it-yourself) growth.
TD Cowen started coverage on AutoZone with an Outperform rating and a price target of $2,975.00, noting that the company “has done a commendable job of evolving its legacy DIY business and is taking solid Pro share by building out its differentiated supply chain”.
The firm’s confidence is rooted in AutoZone’s Mega Hub and speed initiatives which are projected to drive DIFM share growth, though it’s anticipated to take several more quarters to regain its momentum.
“Meanwhile, we are more cautious on AAP as it continues to lose share, face margin compression, and cash flow pressure, and a recent debt downgrade further adds challenges,” mentioned the analysts at TD Cowen, initiating coverage on the company with a Market Perform rating and a price target of $55.00.
“A new CEO brings a supply chain background, but is outside the industry and will need to quickly execute on a new strategy following a strategic review,” added the analysts at TD Cowen.
