Bank of America Taps AutoZone, O'Reilly as Top Auto Parts Picks

Bank of America has reinstated coverage on the auto parts retail sector, initiating both AutoZone (AZO) and O'Reilly Automotive (ORLY) with Buy ratings and designating them as top picks. The firm's analysts pointed to a constructive outlook for the industry, driven by an aging U.S. vehicle fleet and persistent inflation in motor vehicle parts.

Favorable Industry Tailwinds

According to Bank of America, several positive trends are supporting the auto parts sector. The firm highlighted that the industry has historically outperformed the S&P 500 by 17% during periods when inflation for motor vehicle parts and equipment remains above 3%.

Key drivers for the sector's outlook include:

• An aging car fleet that requires more frequent repairs and maintenance.
• A less affordable new vehicle market, which incentivizes consumers to maintain their current cars.
• A significant backlog of deferred maintenance from previous periods.
• A structurally sound commercial backdrop, often referred to as the "do-it-for-me" (DIFM) segment.

Top Picks Poised for Commercial Growth

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Bank of America identified the do-it-for-me commercial business as the primary growth engine for leading retailers. The firm believes leaders in the space can sustain double-digit commercial growth in the near term by leveraging their scale, improving supply chain capabilities, and ensuring better parts availability.

AutoZone (AZO)

BofA reinstated coverage on AutoZone with a Buy rating, citing its strong balance sheet. This financial strength allows the company to increase capital expenditures on its supply chain, which in turn improves parts availability and helps it gain market share with commercial accounts. The analysts expect AutoZone to continue delivering outsized sales growth in the DIFM segment.

O'Reilly Automotive (ORLY)

O'Reilly also received a reinstated Buy rating, with BofA favoring it as a growth story. Similar to AutoZone, the firm expects O'Reilly to leverage its scale and strong balance sheet to invest in its supply chain and continue taking market share. Bank of America believes the company's consistent performance and growth potential could lead to further valuation expansion.