Double Upgrades in One Day for Auto Parts

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The endless growth of the auto parts retailers in prior years has been countered by threats from the likes of Amazon and other online retailers nibbling away at the market share. The worst may have been seen finally, and 247/ Wall St. has tracked two analyst upgrades of the same company on Monday and other analyst comments on rivals.

There is an obvious issue that many business-to-consumer and business-to-business channels would have when it comes to auto parts: many parts are needed immediately, and many garages and individuals simply do not or cannot pay to store so many parts on their own.

Merrill Lynch now forecasts material growth in the car population that is six to 10 years old. These older cars are expected to benefit auto parts retailers O’Reilly Automotive Inc. (NASDAQ: ORLY) and Advance Auto Parts Inc. (NYSE: AAP).

Advance Auto Parts saw two analyst upgrades of sorts on Monday. Merrill Lynch raised its rating to Neutral from Underperform, effectively removing a Sell rating, and also raised its price objective to $177 from $123 in the call. The independent research firm Argus reiterated its Buy rating on Advance Auto Parts and raised its target to $184 from $155.

Argus said of the company:

We believe that under the watchful eye of the new Advance Auto Parts chairman, noted activist investor Jeffrey C. Smith, Advance Auto Parts’s CEO Tom Greco will apply his expertise from a 30-year career at PepsiCo to make Advance Auto Parts a more efficient and customer-focused company. We do not expect this turnaround to happen overnight, but expect to see a succession of small victories over the next year, with a strong focus on product availability and instock levels. Apart from the corporate turnaround, the company has been hurt by concerns that Amazon is poised to play a bigger role in the auto parts sector, which had been perceived as being relatively well insulated from online competition. That said, we continue to believe that the sector has some insulation due to its focus on in-store service, relationships with parts suppliers, and established delivery to commercial customers. We also expect comps to improve as the company moves past the lull in repairs that resulted from two mild winters and strengthens its customer service.

According to Merrill Lynch, investors should buy shares of O’Reilly if they are worried about Amazon’s impact on auto parts. The firm’s most recent survey found that about 15% of do-it-yourself auto parts are now being purchased online. That said, the firm also believes that this online sales threat is unlikely to extend materially into other channels yet and the professional repair shops require faster delivery than Amazon can provide compared to that of O’Reilly. Merrill Lynch raised its price objective on O’Reilly to $390 from $330 as a result.

According to the Merrill Lynch views on the rise in older car models, this is expected to benefit dealers such as CarMax Inc. (NYSE: KMX) and America’s Car-Mart Inc. (NASDAQ: CRMT), as well as auctioneer KAR Auction Services Inc. (NYSE: KAR).

O’Reilly Automotive was last seen trading up 0.7% at $341.00, and it has a 52-week range of $190.00 to $351.65.

Advance Auto Parts traded up 1.1% at $167.37. Its 52-week range is $78.81 to $170.91.

CarMax traded up 0.3% at $80.75 on Monday, in a 52-week range of $57.05 to $81.67.

America’s Car-Mart shares were flat at $82.65. The 52-week range is $39.58 to $100.75.

Shares of KAR Auction Services were down 0.3% at $62.42. Their 52-week trading range is $45.11 to $64.55.

One potential loser may be AutoZone Inc. (NYSE: AZO) according to Merrill Lynch. The firm downgraded AutoZone to Neutral from Buy, but its shares were up 1.1% at $757.50 after Monday’s open.