Advance Auto Parts still has 'too many risks' despite sell-off says analysts

© Reuters.

By Sam Boughedda

Advance Auto Parts (NYSE:AAP) was downgraded to Hold from Buy at Truist and to Neutral at Citi.

Truist analysts slashed the firm's price target on AAP to $147 from $228 per share, telling investors in a note that there are too many risks to stick around even after the substantial sell-off on Wednesday. Advance Auto Parts shares closed 15% lower following its worse-than-expected Q3 results.

"While we remain bullish on the auto parts retail industry, Advance still hasn't been able to show the improvement in growth/consistency that many investors (ourselves included) have expected," wrote the analysts. "While our downgrade of the stock following today's ~16% sell-off (compared to the S&P down ~1%) is clearly late, the company continues to lose market share, especially in Commercial. In addition, the company is looking to make price investments to improve its competitive positioning, even though raising prices has been one of their biggest GM drivers in recent quarters. "

AAP shares are down a further 3% Thursday.

Citi analysts also lowered the firm's price target on the stock to $161 from $216, explaining that the company's market share loss and margin path uncertainty means they have shifted to Neutral.

"AAP operates in a defensive category that should be resilient in the face of weaker consumer spending in 2023, but we are concerned about market share losses on the DIFM side, we question the length of time and magnitude of investment necessary to reaccelerate growth, and we struggle to find catalysts to reignite the margin expansion path until at least the 2H23," they said. "We recognize share weakness following 3Q earnings provides a lower valuation, but we still see a balanced risk/reward at current levels based on limited upside potential to earnings in the near-term."