AutoZone Stock: Why Wedbush Turned Cautious

AutoZone (AZO) stock fell nearly 2% yesterday following a rating downgrade by a prominent Wall Street analyst. Wedbush analyst Seth Basham reduced his rating on the stock to “neutral” from “outperform.” Basham also lowered his target price to $1,225 from $1,375 yesterday, according to a flash update from TheFly.

Basham’s latest rating downgrade and target price cut is in contrast with his December 10 update. On December 10, he raised the stock’s target price to $1,375 from $1,240 following AutoZone’s robust first-quarter fiscal 2020 results. The analyst also reaffirmed his “outperform” recommendation for the stock. TheFly reports Basham said he believed the industry’s solid fundamentals, along with AutoZone’s strong inventory and sales-driving initiatives, would continue to enhance its performance.

Why Basham downgraded AutoZone stock

Basham cited AutoZone’s high valuation and near-term headwinds as his main reasons for downgrading AZO stock, according to TheFly. The analyst stated that, with AutoZone stock’s 40% price upswing last year, the stock’s valuation is close to peak levels.

With a return of 42% last year, AutoZone stock was the top performer among auto part retailers. It also outperformed the Dow Jones and the S&P 500, which gained 22% and 29%, respectively, last year.

On the contrary, many of AutoZone’s peers failed to keep up with the broader market in 2019. Dorman Products (DORM) stock was the weakest, falling 16% last year. Advance Auto Parts (AAP), Genuine Parts (GPC), and O’Reilly Automotive (ORLY) stocks gained 1.7%, 10.7%, and 27.3%, respectively, in 2019.

As a result of its robust upswing, AutoZone stock is valued near the industry average. AutoZone stock’s current one-year forward PE multiple is 17.7x, slightly lower than the industry average of 19.7x. The stock’s price-to-sales ratio of 2.3x is significantly higher than the industry median of 0.7x.

Additionally, Basham cautioned that unfavorable weather and a possible rise in inflation could hurt AutoZone’s near-term growth. According to TheFly, Basham “sees continued top-line momentum from company initiatives but sees modestly more risk from less favorable weather and fading tariff-driven inflation later in the year.”

Other analysts remain optimistic

Wedbush is the first research company to have downgraded AutoZone stock since the company’s first-quarter fiscal 2020 earnings release on December 10. Many analysts became more confident about the stock after its impressive results and raised their target price for AZO.

On December 10, Oppenheimer analyst Brian Nagel raised his target price for AutoZone stock by $190 to $1,415. The analyst also reaffirmed his “outperform” rating on the stock. According to TheFly, Nagel believes that sustainable commercial sales growth and moderate spending could boost AutoZone’s bottom line.

On December 11, Christopher Horvers of JPMorgan Chase also raised his target price for AZO, by $85 to $1,310, and reiterated his “overweight” rating for the stock. AutoZone’s improving gross margin and same-store sales impressed the analyst. Other upward target price revisions by analysts were as follows:

  • Jefferies increased the target price by $150 to $1,300.
  • UBS raised the target price by $215 to $1,425.
  • Citigroup revised the target price to $1,435 from $1,363.
  • Morgan Stanley increased the target price by $100 to $1,200.
  • Stephens raised the target price to $1,350 from $1,250.
  • Raymond James revised the target price to $1,350 from $1,250.
  • Instinet upped the target price to $1,345 from $1,250.

Analysts’ average target price on AutoZone stock has increased to $1,335.59 from $1,190 on December 9. That target price implies a 15% upside from its January 6 closing price of $1,165.71.