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Credit Suisse Cuts Estimates On Auto Parts Retailers As Earnings Approach

AZO, GPC, AAP, MNRO, ORLY | October 21, 2016

Previewing the third-quarter results of auto parts retailers, Credit Suisse said sluggish trends continued in third quarter, with company-specific factors also impacting performance. Accordingly, the firm lowered its estimates for the companies in the space.

September Improvement, Improving 2-Year Trends

However, analyst Seth Sigman sees the recent commentary from Monro Muffler Brake Inc (NASDAQ: MNRO) and Genuine Parts Company (NYSE: GPC) regarding improvement in September and the stabilizing or improving two-year trends are the bright spots. This, according to the analyst, bodes well for retailers such as O'Reilly Automotive Inc (NASDAQ: ORLY) and Advance Auto Parts, Inc. (NYSE: AAP), which are due to report in the next few weeks.

Improvement Gradual

Credit Suisse expressed uneasiness at the more gradual than expected improvement and believes something beyond weather is impacting performance. The firm noted that the lower-income employment and earnings having a co-relation with auto parts sales overt time has decelerated recently. Meanwhile, the firm sees salvation coming from the colder winter weather.

Results Re-Acceleration Needed

With valuations high in the group, concerns about e-commerce and investor fatigue with retail winners, the firm believes there is pressure on these companies to re-accelerate results. For the stocks to work from the premium valuation they have traded in recent years on the back of strong fundamentals, Credit Suisse is of the view that reaffirmation will be needed.

Trimming Estimates For Advance Auto Parts On Margin Pressure

Credit Suisse lowered its third-quarter earnings per share estimate for Advance Auto to $1.69, citing lower margins. However, the firm left its comps. estimate intact at -3.5 percent. Lowering margins for 2017, the firm reduced its EPS target to $7.60 from $8.18. The firm seeks sequential improvement in second-half comps. and greater visibility on the strategic plan.

AutoZone To See Improvement In Latter Part Of Quarter

The firm adjusted its first quarter comps for AutoZone, Inc. (NYSE: AZO) to +1.5 percent and earnings per share estimate to $9.30. Expecting improvement in latter part of quarter, the firm said its full year earnings per share estimate goes to $45.24 from $45.49. Accordingly, the firm lowered its price target to $814.

Maintaining Estimates For O'Reilly

Credit Suisse expressed comfort at its third-quarter comps estimate of 4 percent and its $2.90 per share earnings estimate for O'Reilly. However, the firm trimmed its 2016 and 2017 earnings per share. While confident that the company will execute over the next 12 months, Credit Suisse said its premium valuation leaves little room for error.

Ratings/Price Target

Advance Auto Parts: Outperform/$171.
AutoZone: Outperform/$814, down from $870 previously.
O'Reilly: Outperform/$290.

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