Investing.com -- Bank of America has reinstated coverage on the auto parts retail sector, highlighting two stocks as top picks amid an aging vehicle fleet and sustained inflation in motor vehicle parts.
The firm sees the combination of consistent performance and strong sales growth as key drivers for the sector, particularly in the do-it-for-me commercial segment that has become the primary growth engine for leading retailers.
The investment bank notes that the sector historically outperforms the S&P 500 by 17% during periods when motor vehicle parts and equipment inflation remains above 3%. Several positive tailwinds support the industry outlook, including an aging car fleet, a less affordable new vehicle market, a deferred maintenance backlog, and a structurally sound commercial backdrop.
Bank of America analysts believe double-digit commercial growth is sustainable in the near term for the sector's leading players, which are leveraging their scale to gain market share with commercial accounts through improved supply chain capabilities and better parts availability.
1. AutoZone (AZO) -Bank of America reinstated coverage with a Buy rating on AutoZone, positioning it as a top pick in the auto parts retail space. The firm highlights the company's strong balance sheet, which allows it to deploy more cash flow into capital expenditures to further build out supply chain capabilities. This investment is improving parts availability and helping AutoZone gain share with commercial accounts. The analysts expect the company to benefit from its scale advantages and continue delivering outsized sales growth in the do-it-for-me segment.
2. O'Reilly Automotive (ORLY) -Bank of America also reinstated coverage on O'Reilly with a Buy rating, citing similar strengths to AutoZone. The firm favors O'Reilly as a growth story and expects the company to leverage its scale to continue taking market share. O'Reilly's strong balance sheet enables ongoing investments in supply chain capabilities, positioning it well to capture commercial growth. Bank of America believes the company's consistency and growth potential should drive further valuation expansion.
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