To The Moon

Asian shares were mostly lower Monday after U.S. stocks coasted to the close of their latest winning week on Friday, even as Nvidia ’s stock cooled further from its startling, supernova run. U.S. futures and oil prices dropped. The best-performing concepts is Automotive Retail.

Considering the different perceptions of the stock, this time TigerPicks chose $AutoZone(AZO)$ to have a fundamental highlight to help users understand it better.

$AutoZone(AZO)$

AutoZone, Inc. is an American retailer of aftermarket automotive parts and accessories, the largest in the United States.

Founded in 1979, AutoZone has 7,140 stores across the United States, Mexico, Puerto Rico, Brazil and the US Virgin Islands. The company is based in Memphis, Tennessee.

AutoZone store

Since January 2010, AZO has returned 1,670%, beating the $S&P 500(.SPX)$ by more than 1,100 points.

Chart

Since October 15, which had a Hold rating, the stock has returned 9%, lagging the S&P 500 by 13 points in what has become a rare period of underperformance.

Secular Growth In The Consumer Space

With a market cap of $48 billion, AutoZone is one of the biggest consumer stocks in the United States. However, it's not your "average" consumer stock selling "nice to have" products.

As most people reading this will know, AutoZone sells auto parts.

Going into this fiscal year, it operated 6,300 stores in the United States, 740 in Mexico, and 100 in Brazil.

Paraphrasing the company's own words, all of these stores offer a wide range of products for cars, SUVs, vans, and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and some non-automotive products.

Needless to say, the company's website reflects this as well.

Image

If you're looking for car parts and supplies, AutoZone has you covered.

Having said that, this is not the main reason why I'm interested in AutoZone.

What matters to me is the incredible secular tailwind driving sales growth.

That growth driver is the elevated average age of American cars.

As reported by S&P Global on May 22:

The average age of cars and light trucks in the United States has risen again to a new record of 12.6 years in 2024, up by two months over 2023, according to new analysis. - S&P Global

US Average Age by Vehicle Type 2024

Moreover, the following quote (emphasis added) applies to companies like AutoZone:

This continues to improve business opportunities for companies in the aftermarket and vehicle service sector in the US, as repair opportunities are expected to grow alongside vehicle age.

"With average age growth, more vehicles are entering the prime range for aftermarket service, typically from 6 to 14 years of age," said Todd Campau, aftermarket practice lead at S&P Global Mobility. "With more than 110 million vehicles in that sweet spot — reflecting nearly 38 percent of the fleet on the road — we expect continued growth in the volume of vehicles in that age range to rise to an estimated 40 percent through 2028." - S&P Global

40% growth in cars aged 6 to 14 years through 2028 would be a huge benefit for AutoZone!

Moreover, because elevated inflation and subdued consumer sentiment keep some people from buying new cars, the impact of weak consumer sentiment isn't hitting AutoZone as hard as other companies, which is a huge benefit.

A Closer Look At AutoZone

As I already briefly mentioned, AZO shares have come down a bit, trading roughly 14% below their all-time high after a very strong start to this year.

Chart

With that said, earlier May, the company reported the third quarter earnings of its 2024 fiscal year.

The company saw 3.5% higher total sales, with same-store sales growth of 1.9% on a constant currency basis.

Moreover, despite challenges such as delayed tax refunds and unfavorable weather conditions, the company managed to grow its operating profit by 4.9% and its earnings per share by 7.5%.

Image

Adding to that, the company is doing well in the commercial segment, growing commercial sales by 3.3%.

This was supported by initiatives like improved satellite store inventory availability, better Hub and Mega-Hub coverage, and the strength of the Duralast brand, which is exclusively sold at AutoZone.

Currently, 92% of its stores incorporate a commercial program, which allows AutoZone to leverage its existing infrastructure to capture a larger market share in a highly fragmented commercial market.

On top of that, international sales are strong, with international same-store sales growing by more than 9.3% (on a constant currency basis).

The company also increased its footprint, opening 32 new stores in the U.S., growing its store count by 7.0% in Mexico, and boosting its Brazilian footprint by almost a third.

Image

With regard to improving operations, AutoZone is using a strategy used by many successful consumer companies, including $Amazon.com(AMZN)$ : it is moving inventory closer to customers.

In this case, the construction of two new distribution centers in California and Virginia, on top of the expansion of the company's facilities in Mexico, is critical to supporting future growth, as it allows the company to respond faster to demand.

This is a fantastic strategy that has been praised for many years, including in this 2021 article (emphasis added):

Having the right SKU in the right place at the right time is a perennial inventory problem for retailers. Solving it often requires investments in more distribution centers to increase fulfillment speed or reach.

But AutoZone’s strategy focuses more on building out its store network for replenishment.

The auto parts retailer has spent decades expanding the inventory assortments at select stores, which it has called “hubs” in 10-K filings since at least 2001. These hubs act as mini distribution centers, delivering fast-selling SKUs to stores within its network on a same-day basis, and slower-selling units overnight. - Supply Chain Drive

In general, the company is focusing on faster delivery times and better parts coverage to boost its market share.

Thanks to its successes, the company continues to reward investors.

As it does not have a dividend, the company's distribution of choice is indirect distribution through buybacks.

In fact, because the company has a healthy balance sheet with an investment-grade BBB credit rating and a sub-2x leverage rating, it spends most of its free cash flow on buybacks.

Over the past ten years, AZO has bought back 47% of its shares, which massively contributed to its stellar stock price performance.

Since January 1, 2000, the company has bought back 87% of its shares!

Chart

This year, analysts expect the company to generate $2.6 billion in free cash flow, which translates to 5.4% of its market cap.

By 2026, that number is expected to be $3.0 billion, or 6.3% of its market cap.

These numbers are very beneficial for future buybacks.

Now comes the bad news.

Valuation

First of all, analysts agree with the company and expect it to maintain elevated growth.

Using the FactSet data in the chart below, the company is expected to grow its EPS by 15% this year, potentially followed by 9% and 10% in 2025 and 2026, respectively.

Image

Over the past two decades, AZO has traded at a normalized P/E ratio of 15.4x. Its ten-year P/E average is 17.0x. Using a 17x multiple, the company has a fair stock price target of $3,119, which is 12% above the current price.

That is not a great risk/reward, as the stock has gotten ahead of itself in recent quarters.

While I have little doubt that the company will continue to grow its business, growth expectations are below historical growth rates, with additional pressure from "higher-for-longer" inflation and interest rates. This could also hurt its valuation, as a "premium" valuation may not be warranted unless consumer health improves.

Hence, in order for me to turn bullish, I would need another 10-15% correction.

Other than that, I think AZO is one of the best consumer stocks on the market that would make a lot of sense in my dividend growth portfolio - despite the absence of a dividend.

Furthermore, because of my Hold rating, I'm going with Bulls vs. Bears at the end of this article instead of Pros & Cons.

Takeaway

AutoZone stands out as a strong player in the consumer sector, driven by the secular trend of aging vehicles, which is likely to boost demand for aftermarket parts for many years to come.

Despite not paying a dividend, AutoZone's impressive share buybacks and strategic initiatives, like expanding its distribution network, would make it a great addition to my long-term portfolio.

I'm also cautious about its current valuation and would prefer a further 10-15% price correction before buying, as shares have gotten a little ahead of themselves in what is likely to be a more challenging economic environment for consumer stocks.

Bulls vs. Bears

Bulls say:

• Secular Growth Driver: With the average age of American cars hitting a record 12.6 years, AutoZone benefits from the increasing demand for auto parts.

• Strong Financials: AutoZone has a healthy balance sheet, an investment-grade credit rating, and substantial free cash flow used to aggressively buy back stock.

• Strategic Expansion: The company's focus on improving inventory distribution and expanding its footprint in the U.S. and internationally supports long-term growth.

• Commercial Segment Growth: Initiatives like improved inventory availability and the strength of private brands help it to penetrate this fragmented market.

Bears say:

• Valuation Concerns: AutoZone's current stock price may have gotten ahead of itself, making it less attractive from a risk/reward perspective.

• Economic Pressures: Higher-for-longer inflation and interest rates could pressure growth expectations and overall stock market sentiment.

• No Dividend: The company does not pay a dividend, which may be an issue for investors looking to benefit from direct shareholder distributions.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 18 Wall Street analysts offering 12 month price targets for AutoZone in the last 3 months. The average price target is $3,198.65 with a high forecast of $3,450.00 and a low forecast of $2,600.00. The average price target represents a 6.97% change from the last price of $2,990.35.

Resource:

https://seekingalpha.com/article/4696094-aging-cars-soaring-profits-how-autozone-is-crushing-the-consumer-market

What are your thoughts on $AutoZone(AZO)$?

Or do you know other companies in the industry?

Please leave your comment below.