June 30, 2022

Auto Avenue

Auto Avenue

Why Auto Parts Stocks Can Shift Higher

  • Auto parts retailers are going to face tougher year-over-year comparisons in the months ahead than much of the sector, given 2020’s pandemic-related lockdowns. Yet, Wells Fargo argues there’s more than enough reason to stay upbeat about the group.

Analyst Zachary Fadem reiterated Overweight ratings on AutoZone (AZO) and O’Reilly Automotive (ORLY) on Wednesday, while raising his price target on each to $1,500 from $1,375 and $535 from $525, respectively. He reiterated an Equal Weight rating on Advance Auto Parts (AAP) but raised his target to $185 from $165.

He’s more confident in the category in general looking ahead, writing that initial sales data from January and February were better than he expected. In addition, difficult year-over-year comparisons look less daunting in the face of stimulus—and potentially minimum-wage increases farther in the future—as well as cold and snowy winter weather in much of the country. While miles driven may still be lower than pre-pandemic levels, he thinks these other factors will bolster demand.

Longer term, Fadem argues that the outlook is even more favorable for the group. Eventually, miles driven will return to pre-2020 levels as the economy reopens, while the increasing age of the average vehicle will also necessitate more repairs.

Moreover, he thinks the U.S. will see a “potentially one of the more robust domestic travel (i.e. driving) seasons in recent history,” not only from people returning to work but also more travel and vacations.
Data from TSA checkpoints show that air travel, while off its lowest levels, is still down more than 70% since the start of the pandemic. Road trips are not only safer from a transmission perspective, but could continue to look more economical if pent-up demand boosts airfares.

Naysayers will point to the increase in electric vehicles as a headwind, but even with their rise in popularity they still account for less than 1% of cars on the road. “While uncertainty likely persists, we believe the industry has ample time to figure this out, and when it does, we expect scale players (AutoZone, O’Reilly, Advance Auto Parts) to lead,” Fadem writes.

Source : https://www.google.com/amp/s/www.barrons.com/amp/articles/why-auto-parts-stocks-can-shift-higher-51615999475