We recently demonstrated that the auto parts retail category is no longer fragmented and is close to fully consolidated. We also laid out various reasons why the retailers were over-earning historically and why comps may not accelerate near-term. With this market view, we see risk from both Amazon and Wal-Mart (Covered by S. Mushkin) and the risk to Retailer comps/margins as the single biggest issue facing the retailers.
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AZO’s multiple has already re-rated, but we still think there could be another leg down if fundamentals follow. We think this is a real possibility given that industry growth and consolidation are decelerating, AZO’s comp drivers are lapping, competition is intensifying, and AZO has the most risk from online encroachment/price transparency. Our CY 2018 Target Price of $429 uses 10.5x 2019 CY EPS of $40.87. We also see AZO as an effective pair against ORLY for those seeking a turn in trends.
Field work – See our accompanying note studying e-commerce risk and the latest threat from big box retail and the e-commerce giants as we had several interesting findings worth flagging for investors.
The stability in KMX’s Used Gross Profits has been somewhat remarkable in light of declining used car prices, weakness experienced at peers, and presumably a higher sourcing cost of vehicles at auction due to a higher lease penetration on new vehicle sales.
KMX reported 1Q before the open. Used unit comps of 8.2% were above our 7.0% and Consensus of 6.9%. EPS of $1.13 was above our $0.94 and Consensus of $0.98 as KMX saw improvement in Wholesale and CAF, accrual adjustments in EPP’s, and some SG&A leverage. Shares were up +7% in pre-market, turned negative mid-day, before finishing +1%.
KMX reported first quarter results this morning (6/21/17) before the open. Used unit comps of 8.2% were above our 7.0% and Consensus of 6.9%. GAAP EPS of $1.13 was well above our $0.94 and Consensus of $0.98 as CAF income inflected positively, Wholesale headwinds decelerated, and SG&A leverage improved on a strong comp and quarterly share price weakness, which kept SBC in check. Shares +8% pre-market.
We are initiating F with a Peer Perform rating and $10 CY 2018 Fair Value using the current 7.0x NTM multiple on our 2019E Adj. EPS of $1.46. This multiple is consistent with its 1-YR average but below its 3-and 5-year multiples. Our $10 CY 2018 Price target leaves -9% downside, which is partially offset by Ford’s ~5% dividend yield.
We are initiating GM with a Peer Perform rating and $33 CY 2018 Fair Value using the current 6x NTM multiple on our 2019E Adj. EPS of $5.44. Our $33 CY 2018 Fair Value leaves -5% downside, which is partially offset by GM’s ~4% dividend yield.
Today (6/12/17) we initiated on Ford Motor Company and General Motors Company with Peer Perform ratings. We initiated with CY 2018 Fair Values of $10 for Ford and $33 for GM.
We are initiating coverage of both Ford and GM with peer Perform ratings and FY2018 price targets of $10 and $33, respectively. We also present two industry reports, this one studying macro risks and a second looking at the fundamental setup between F and GM.
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