On Wednesday, JPMorgan (NYSE:JPM) adjusted its outlook for AutoZone (NYSE:AZO) shares, listed on NYSE:AZO, by reducing the price target to $3,110 from the previous $3,200, while still maintaining an Overweight rating on the stock.
The adjustment reflects a continuation of the recent trend where AutoZone has experienced underwhelming domestic comparable sales for the fifth consecutive quarter.
The analyst pointed to several factors affecting this performance, including persistent pressure on low-end consumers and maintenance deferral.
According to the analyst, the slowdown in the category is partly due to these deferrals, which can potentially last for an extended period, as seen historically from 2006 until the Global Financial Crisis.
However, there is an expectation for improvement as the company is now moving past the initial deferral period that began last year, and pricing is anticipated to hit a low point. The weather also played a role in the recent performance, but it is expected to be less of a factor moving forward.
Despite the challenges, AutoZone has been able to manage its margin structure effectively. The company's strategy of adjusting its margins as necessary between cost of goods sold and selling, general & administrative expenses has been highlighted.
The analyst noted that AutoZone's business model remains robust, especially when domestic comparable sales growth exceeds 2%, which is projected to start in the first quarter of 2025.
The report also introduced forecasts for fiscal year 2026 and mentioned that while bears might argue for a valuation 7% below current levels, there are no apparent signs of market share loss.
This is particularly relevant given the potential risks to comparable sales for competitors Advance Auto Parts (NYSE:AAP) and O'Reilly (NASDAQ:ORLY) Automotive in the upcoming quarter, which suggests that the issue is more related to consumer behavior than company-specific problems.
JPMorgan's revised price target of $3,110 is based on 19 times the firm's fiscal year 2025 earnings forecast. The firm's stance is that AutoZone deserves a premium valuation relative to the market average due to the quality of the company and the industry, along with its typical low double-digit earnings growth algorithm.
InvestingPro Insights
In light of JPMorgan's adjusted outlook for AutoZone, current InvestingPro data shows that AutoZone has a market capitalization of $48.81 billion and trades at a P/E ratio of 22.34. Notably, the company's P/E ratio based on the last twelve months as of Q2 2024 is adjusted to a lower figure of 18.62. This suggests that the stock may be trading at a high price relative to near-term earnings growth, as indicated by one of the InvestingPro Tips.
Another aspect for investors to consider is the company's recent performance in terms of stock price. Despite a 3.73% decline in the 1-week price total return and a 4.76% decrease over the past month, AutoZone has shown resilience with a 9.1% year-to-date price total return as of 2024. This aligns with the InvestingPro Tip highlighting the stock's low price volatility and strong return over the last decade.
For those looking to delve deeper into AutoZone's financial health, the InvestingPro platform offers additional insights, including 10 more tips for a comprehensive analysis. Interested investors can explore these valuable insights and receive an additional 10% off a yearly or biyearly Pro and Pro+ subscription using the coupon code PRONEWS24.
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