(By Balachander) AutoZone Inc. (NYSE:AZO) shares were upgraded to "Buy" from "Hold" by Deutsche Bank analyst Mike Baker, who also raised price target on the stock to $425 from $385.
Baker wrote that economic concerns should weigh against new car sales and gas prices are falling, both of which are favorable for AZO's comps.
The analyst is of the view that the Memphis, Tennessee-based retailer of automotive replacement parts has the best opportunity for further share gains in commercial which leads to industry leading sales trends.
Operating margins continue to increase, helped by stable pricing and leverage and stocks with defensive characteristics should get a higher relative multiple in a difficult macro environment, Baker wrote.
"Stable pricing as well as leverage on better sales also enables us to increase our margin and free cash flow forecasts, driving a 4Q12 and 2013 EPS estimate of $8.49 and $27.40, up from $8.21 and $25.94," the analyst wrote.
"The higher growth rate, along with our view that defensive names would get a higher multiple in this environment, lead us to increase our target multiple to 15x and our target price to $425 from $385," said Baker. "This biggest risk is weak consumer spending impairs same store sales."
AZO shares, which have been trading in the 52-week range between $266.25 and $399.10, added 0.64 percent to trade at $377.44.