Insights

Even at $2,000, This Auto Stock Is Undervalued

Headquartered in Memphis, Tennessee, AutoZone (NYSE: AZO) has been an auto parts mainstay for more than 42 years. The company has had its share of ups and downs, and has seen its share price accelerate from hundreds of dollars to over $2,000. This price point may seem difficult to justify during a time of macro-level challenges, especially high inflation and supply chain bottlenecks.

Yet, investors should bear in mind that a seemingly high share price doesn’t necessarily preclude a good value. This is particularly true in AutoZone’s case if the company is able to withstand economic challenges and justify its stock price with growth across key metrics.

When measuring this growth, investors should moderate their expectations in light of an industrywide difficulty in sourcing materials. Even if the company’s growth rate isn’t growing, AutoZone should still impress value seekers with its surprisingly strong performance.

AutoZone in the buy zone

At the very least, it’s safe to surmise that AutoZone sees its shares at bargain prices as the company ramps up its buybacks. During the second quarter of fiscal 2021, AutoZone repurchased 783,000 shares of its common stock for $1.6 billion; soon afterward, the company’s board approved an additional $2 billion worth of share buybacks. In the third fiscal quarter, AutoZone repurchased 449,000 shares of its common stock — not as much as in Q2, but it’s still a sign of the company’s self-confidence.

Another sign that AutoZone is a worthy buy-and-hold stock is the company’s low valuation according to a time-tested metric. Specifically, AutoZone’s trailing price-earnings (P/E) ratio is 18, which compares favorably to 19 for both O’Reilly Automotive  and Advance Auto Parts.

Beating expectations, if not inflation

AutoZone, like just about any other automotive-market business in the U.S., has been susceptible to rising input costs and margin destruction this year. But while it couldn’t avoid the impact of inflation entirely, the company has demonstrated impressive resilience. In its fiscal Q2, AutoZone’s gross margin (defined as gross profit as a percentage of sales) declined 59 basis points year over year to 53%, and in Q3 it decreased to 51.9%. Meanwhile, its cost of sales in Q3 increased 7% to $1.86 billion — another sign that inflation, and perhaps supply chain issues, are taking a toll to a certain extent.

At the same time, AutoZone surpassed Wall Street’s top- and bottom-line expectations in its Q3 (ended May 7), when the U.S. annualized inflation rate was already above 8%. The company’s diluted earnings per share increased 9.6% to $29.03, easily outperforming the FactSet analyst consensus estimate of $26.18 per share. Moreover, AutoZone’s quarterly net sales increased 5.9% to $3.9 billion, beating Wall Street’s prediction of $3.71 billion. On top of all that, AutoZone’s Q2 domestic same-store sales (defined as sales for stores open at least one year) increased 2.6%, while the analysts had anticipated a decline of 0.1%.

Challenging, indeed

Without citing inflation and supply chain issues in particular, AutoZone Chairman, President, and CEO Bill Rhodes acknowledged that his business is operating in “unique and challenging times” in which AutoZone will take “nothing for granted.” Given these headwinds, it was practically inevitable that the company’s input costs would increase and margins would diminish somewhat.

Nonetheless, AutoZone managed to open new stores in multiple countries, buy back hundreds of thousands of its own shares, and beat the Street’s revenue and earnings forecasts in fiscal Q3. Besides, AutoZone’s P/E ratio compares favorably to the company’s peers. Therefore, investors should look past the quadruple-digit price tag, focus on value, and consider AutoZone stock as a prime all-weather holding.

David Moadel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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