AutoZone: No Repeat

One of the more interesting stock moves this week is that of AutoZone (AZO). Considering its all-time high, bullish investors might find it interesting to look more closely at this particular debt ridden equity. But solvency is not the only reason posing a risk to the current value of AutoZone shares.

Analysts have upgraded this stock, and at times, set even higher price targets. Apparently U.S. drivers had turned into “home mechanics” during the 3 months that ended February 14, 2009. The numbers speak for themselves. Sales are up, indeed.

Investors are bidding up these stocks in anticipation of a striving auto parts industry. They believe that the demand (and need) for transportation must be met (and self-serviced) at all times. One could argue in their favor and stipulate that the ailing car industry creates a vacuum since the demand for transportation still remains. And that vacuum was partially (and undoubtedly) filled by AutoZone (and the likes) during Q-2. But could there be conceivably other forces at play here?

Well, let’s look back at the events within the aforementioned time frame. It might help to look at gas prices. Here is a chart released by the Department of Energy:

click to enlarge image

Investors might want to consider relating AutoZone’s current earnings to a (one-time) monumental and historic collapse in oil prices. Understandably, some investors will take a bullish perspective for this very reason: Low gas prices translate to sustainable and (no thanks to the carmakers) even higher earnings for the auto-part makers.

But still, with respect to the more recent collapse in oil and gas prices, we are talking about unique, maybe unusual, events here. Look closely at when gas prices bottom: December 28, 2008. That is exactly (to the day) at the middle of a second quarter earnings report.

Disclosure: Short AutoZone

Comments

[johngonole:]

In normal times with this type of growth prospect this might be a fair value. While the downturn may indeed broaden their customer base they are highly leveraged as you state. Any missteps and this company could find itself in real trouble.

Long term people are more likely to put off the cosmetic or no urgent repair needs sometime way into the future. On the low end of the socio-economic scale people might even put off getting their air fixed.

So while sales may increase I think its short term. More middle class buyers but fewer lower income buyers as they put off repairs and even give up their cars.

On the otherhand I don't think bankrupcy is in their future since cash flow is strong.

There are better values to be had. I'd certainly buy EBAY, DELL, or MSFT here versus AZO long term. Cheaper, stronger balance sheets, and better overall growth prospects.

Mar 06 02:08 AM

[User 370887:]

What if AZO were to aquire one of the bigger warehouse distrubutors in the aftermarket?

Mar 06 06:21 AM

[User 370887:]

oops-distributor


On Mar 06 06:21 AM User 370887 wrote:

> What if AZO were to aquire one of the bigger warehouse distrubutors
> in the aftermarket?

Mar 06 06:22 AM

[Marcap:]

Facts:

1. AutoZone shares are trading at near their 52-week high, trading at $152.76 vs a 52-week high of $157.49.

2. Net Shareholder Equity is actually negative after deducting Goodwill of $302.6M. Net S/H Equity (Deficit) = ($242.648B).

3. Share book value is still only $1.04 even if we include Goodwill, which means that at $152.76, AZ is trading at almost 147 times book value.

4. Current Liabilities slightly exceed Current Liabilities. CL = $2.528B vs CA = $2.462B

5. Sales for the year ending Aug 30, 2008 were only up 5.7% from the prior year. 2008 = $6.523B vs 2007 = $6.170B

6. Sales for most recent Q1 (Nov 30, 2008) were actually down 33% from Q4 (Aug 30, 2008). Q1 = $1.478B vs Q4 = $2.211B

Opinions:

The fact that people are not buying as many new cars, in my opinion should not greatly impact after-market sales for auto parts, since the only thing which really changes is ownership. After all, even I were to buy a new car today, someone else would likely buy my old one and eventually need parts for it. Thus it would not be a car removed from the market. Sure there will be some cars which will go to the scrap yards as opposed to being sold, but that is always the case no matter if people buy new cars or not, since most cars do eventually get to the point where it costs more to fix them, than they are worth. And of course, there will still be accidents and therefore car write-offs. So unless the insurance companies suddenly decide to fix seriously damaged cars as opposed to writing them off, I see no significant rise in after-market auto-parts sales.

Conclusion:

I agree with Dan. At $152.76, I believe that AutoZone is way over-priced. At $152.76 per share, I think that shorting this stock is among one of the best shorting opportunities available today. Time of course will tell.

Unlike Dan, I do not hold any position in this stock.

Mar 06 11:19 PM

[Marcap:]

Correction:

In my Facts # 2 above: Net S/H Equity (Deficit) should read ($242.648M) and NOT ($242.648B) as stated.

Mar 07 01:20 AM

[Chris coxbl...:]

Hey Marcap I am glad someone finally brought up this point...I have searched through a ton of analysts and been watching this fast Eddie special for a while and I was totally flabbergasted that no one brought up the fact they are functionally insolvent...

they also had negative cash flow this Q and used borrowed money to buy back stock...

Having said that AZO is tightly controlled and ESL has about 40+% last time I checked

IMO Dan's article would be far stonger had he brought up these points

here is a link to latest release for anyone wishing to check out the #'s for themselves

nocache-phx.corporate-...=

Mar 07 12:29 PM

[Clumsy Rick:]

I don't think its people just buying fewer cars, its people are scrapping fewer old ones as well. Analysts refer to it as increasing the avg age of vehicle on the road sometimes. I read reports that say it is increasing sharply right now, but i haven't seen the original source data myself.

The negative equity is an accounting fiction. Its negative because they bought back so much stock, not from losses. They haven't lost money in over 15 years, or at least as far as my model goes back (1992). That's why analysts don't care about...it doesn't matter to earnings or earnings potential going forward real solvency. Lots of retailers have declared BK over the last few years that looked like they had plenty of equity and assets for that matter, per accounting terms. TWTR, SHRP, ULTE, are ones I've followed. CAO was on the verge as well

2Q has historically always been a low cash generating quarter, often negative. But they still manage to average $500 mm over the last five years and $350 mm over the last 10 years by generating lots of cash in 2H of the year.

Buying back the stock adds leverage to the model, yes. But they generate enough cash to pay it all down in a few years.

They could fix both of the "problems" of negative equity and high debt anytime they want by simply doing a sale lease back on the +2,250 stores they own. This would payoff a large chunk, perhaps most, of the debt. And given many of the properties are worth more a lot more than book value (they have been depreciating for years, some for decades, while real estate has generally been up until last year), so selling them would generate an "accounting gain:" to erase the negative equity.

But why would they do that? The book value/equity statistic misses the real value of the firm- its ability to generate cash and huge returns for equity holders. Or if you prefer raw statistics:

ROE=208% in 2008, +100% the four years before that
ROIC (incl off-BS leases), +20% for last 6 years
Operating margins & profit margins, 17% & 10% last year, highest in industry
ROA=15% in '08

I would much prefer a company that generates large amounts of cash with few assets and less equity than one generating the same cash with more assets and more equity. Let alone a company with lots of assets and little cash generation to show for it.



On Mar 07 12:29 PM Chris coxblocks wrote:

> Hey Marcap I am glad someone finally brought up this point...I have
> searched through a ton of analysts and been watching this fast Eddie
> special for a while and I was totally flabbergasted that no one brought
> up the fact they are functionally insolvent...
>
> they also had negative cash flow this Q and used borrowed money to
> buy back stock...
>
> Having said that AZO is tightly controlled and ESL has about 40+%
> last time I checked
>
> IMO Dan's article would be far stonger had he brought up these points
>
>
> here is a link to latest release for anyone wishing to check out
> the #'s for themselves
>
> nocache-phx.corporate-...;p=irol-newsArticle&am...

Mar 07 07:01 PM

[Dan Schmeidler:]

Thanks for the comments. And thank you seeking-alpha for publishing my article. One could certainly argue for any other investment perspective in relation to drops in gas prices. And this is certainly not an attempt to show that gasoline prices correlate to Autozone's earninings. The focus is on an extraordinary event. Nevertheless, AZO's financials date the bottomm(ing) of a historic collapse in oil prices. This article simply argues that the drop in gasoline prices pulled drivers into their cars, and eventually into Auzones. In my opinion the drop in gas prices was a determinant factor in Autozone's recent earnings. In the absence of such events during the third period, Autozone, in my opinion will not repeat it's most recent performance. One perspective. Pure and simple.

Mar 19 10:48 PM