AutoZone's (AZO) stock price drop was "overdone" as the company's fiscal Q3 was step in the right direction, Morgan Stanley said in a Wednesday note.

Investors are doubting the AutoZone story with its inconsistent execution over the past three to four quarters and the recent underperformance in fiscal Q3, Morgan Stanley analysts said. However, the quarter shows the company is trending positively, as shown in the 6.6% growth in earnings before interest and taxes, the analysts said.

The company has gotten past the peak period of selling, general and administrative expenses, with growth moderating to 7.6% compared with 8.7% in the previous quarter. Gross margin pressure should also ease, with last in, first out charges coming in below expectations, the analysts said.

These developments support an emergence of a margin inflection in earnings before interest and taxes in fiscal Q4 and through fiscal 2027, according to the note.

Morgan Stanley maintained the company's stock rating at overweight and reduced the price target to $3,605 from $4,020.

Price: 3013.32, Change: -86.79, Percent Change: -2.80