BMO starts coverage with ‘sector outperform’, says valuation fair Investing.com

Investing.com– BMO Capital Markets initiated coverage Advance Auto Parts Inc ( NISE: ) ( AAP ) with a “Market Perform” rating, citing the company’s early-stage turnaround as reason to wait and watch.

While management’s strategy appears sound, AAP’s historically poor results and multiple turnaround attempts call for caution, BMO analysts said in a note.

BMO has a $45 price target on the auto parts advance.

AAP’s new strategy, following the sale of its Worldpac business, focuses on exiting the West Coast market, streamlining distribution centers and improving store, merchandising and supply chain operations, BMO analysts said.

The plan also targets over 100 new stores per year and an operating margin of 7% by FY27. However, these targets are below key rivals AutoZone Inc ( NISE: ) ( AZO ) and O’Reilly Automotive Inc ( NASDAQ: ) ( ORLI ), which boast operating margins of close to 20%, analysts said.

Sales softened in 2024 due to adverse weather, hurricanes and economic pressures affecting consumer spending. However, these obstacles are considered temporary, with long-term trends in AAP’s favor, according to BMO analysts.

Although electric vehicle (EV) adoption is a concern in the auto service sector, its short-term impact remains limited. Even with the accelerated growth of EVs, their share of the vehicle market is expected to remain small for the next few years, the brokerage said.

The AAP’s assessment seems fair. Despite its potential, the company’s turnaround efforts must produce tangible results before BMO can improve its outlook, analysts said.

AAP’s focus on operational improvement and favorable industry dynamics are promising, but execution risks and competitive pressures remain key watchpoints, BMO analysts added.