AutoZone Is Headed for a Near-Term Breakdown: Time to Short

After six months of searching I have finally found a stock worth shorting. This stock is the very hot AutoZone (AZO). I know that most people will call me crazy as this is one of the few stocks hitting 52-week highs in recent weeks but the price is just too much hype.

I understand the 'follow the herd' mentality on this one. People are not buying new cars and must keep their old cars running. Therefore, AutoZone and other auto parts sellers are receiving support from the market.

As Charles Rotblut commented in his March 5th article 'Three Retail Stocks to Consider':

“The company is benefiting from the decline in car sales. Consumers are keeping their cars longer and, as a result, are spending on maintenance. (After all, it's hard to get a job if you can't make it to the interview.)”

On the surface this seems like a reasonable idea. The problem is that a large percentage AutoZone's and other auto parts supplier revenue streams come from high margin items which are very discretionary. Buying AutoZone at this time is a mistake as it is overvalued and one of the following two following scenarios will knock it off its high soon.

The price of gasoline is going up. The Chinese and US stimulus packages will work in concert to build demand for gasoline used in construction. The independent oil producers which had in the past used leverage to maintain project spending will not be able to borrow their way into production due to the global credit squeeze. This rise in gasoline prices will lead people to drive less which will hurt the basic automotive parts business. The economic meltdown will cause people to not be able to afford the chrome tipped exhausts offered by AZO even at the low price of $627.99.

One can almost chart the success of AutoZone in the post-recession era by looking at the inverse of gas prices chart as Dan Schmeidler pointed out in his AutoZone: No Repeat article from March 6, 2009.

The stock will get hammered during the inevitable run up of gasoline prices due to the coming dollar devaluation and oil supply shortage.

Is AutoZone a good company?

I believe fundamentally, yes it is.

Am I kicking myself for not getting into the action at less than $100 a share?

Of course AutoZone was undervalued a few months ago.

Would I buy AutoZone now?

No.

If you are a short term trader and own the stock, take your gains now.

If you are a short term trader and do not own the stock, short it now.

If you are a long term investor, keep the stock.

If you still think that the auto parts sector play is for you, I would go with Pep Boys (PBY), which has more automotive repair capability and has not had the run up AutoZone has.

Disclosure: None

Comments

[Pj568:]

Seems like a reasonable short as the AZO buyback policy has levered up the balance sheet to 85x with no working capital and 300M of debt due this year. Don't understand why they want to take this gamble.

Mar 08 05:00 PM

[texas6006:]

All these things could have been said about AZO 3 months ago. You did not even mention that this Company has the worst balance sheet ever, loaded with debt in this tight credit environment. The fact is that it keeps defying gravity because everyone knows what is wrong with the Company and take the same (sell) side amd we end up with too many shorts. My March puts are expiring worthless in this kind of market. That is just insane.

Mar 08 09:45 PM

[notazoner:]

Brian, I'm with you. It's a house of cards. They have zero traction or credibility in the DIFM market. Did I read the recent press release "selected financials" correctly - that they now have negative book value? This company are a financial swindle in true Eddie Lamptert style.

Texas I feel your pain and gave up on puts on this stock. This is one stock I will keep shorting in increasing quantities as it goes higher.

Mar 09 10:55 AM

[W1065232:]

"The problem is that a large percentage AutoZone's and other auto parts supplier revenue streams come from high margin items which are very discretionary."--NO NO NO. U didn't get the AZO or other parts retailers' stories right. The discretionary items sales has been depressed for the past yr&half. It's not the game changer for these stocks. AZO, in particular, does the best job on bottom line.

"This rise in gasoline prices will lead people to drive less which will hurt the basic automotive parts business." -- Why ppl never dig into the gas price-miles driven-parts demand relationships + sensitivities. That drives me nuts. Well, Gas price up does result in less miles driven, which does EVENTUALLY result in less demand in auto parts, but it's a very lagged impact, and it's not the pt here. The real pt here is retail gas price at $4 vs $2 put much less money into consumer's pocket, which drives their behaviors of deferring unnecessary parts purchases (semi-discretionary + total discretionay items).But well, what kinda rise in gas price r u talking abt? $2->$4 or $2->$2.5? yeah, if we were to back at $147 oil price, it would hurt the parts retail sector. well then don't play this sector (esp. NO PBY), play sth else.

"The stock will get hammered during the inevitable run up of gasoline prices due to the coming dollar devaluation and oil supply shortage." -- agree w/ the correlation of AZO's biz & currency part coz they have private labels sourced abroad, but again, it depends on the degree of devaluation + u gotta call this currency part right first. ALSO, why do we need a great mgmt team to invest in a company? We saw what happened to the currency in the past yr or two -> NEVER that big a game changer, or maybe not yet?

Well, I total agree w/ u on the final Q&A part. but plz don't encourage anyone to invest in PBY. that stock is dead till they found someone even much better than Darren Jackson (AAP's CEO) to handle the mess. and before that, I think the great USA already come out of recession and we have so many 10 or 20 baggers out there-> so just forget abt PBY, also forget abt this entire parts retail sector.

I'd take the gain but not short this stock, coz I dont think we have bottomed yet at 680.

Mar 09 12:33 PM

[Car Guy:]

Why did it take 6 months for you to find a stock worth shorting? And this is the best you can do after 6 months?

Mar 09 02:12 PM

[TBill:]

Yup, you are crazy. Well, not all that crazy as you said for long term investors to keep the stock. Who knows where it will go short term?
AZO is a well run company, doing a much better job than PBY. [Shorting PBY might be a good hedge for AZO.]
I've owned it for a while, very happy with it, but due to market conditions have sold out of the money calls on it. Keep watching the top and bottom lines. As long as the numbers hold up, keep the stock.

Mar 09 02:45 PM

[Z C:]

I have to say that I disagree, yes Autozone may take a hit on the market, but so will most if not all the other companies in this area. If you want to see how this company is doing just go into a local store and see how busy they are, I think its obvious that Autozone is doing well and should continue to do well.

Mar 10 12:04 PM

[zendog:]

All you have to do is look at the 7 point afterhours drop after the "buy" recommendation. This one is bound to drop and in a big way...


On Mar 10 12:04 PM Z C wrote:

> I have to say that I disagree, yes Autozone may take a hit on the
> market, but so will most if not all the other companies in this area.
> If you want to see how this company is doing just go into a local
> store and see how busy they are, I think its obvious that Autozone
> is doing well and should continue to do well.

Mar 10 06:12 PM

[Kevin_S:]

Sometime in the future, even AMAZON (or even Costco) will sell auto parts, putting many auto part stores out of business or leave them empty.

Mar 11 10:06 AM

[Kevin_S:]

If someone tips amazon.com to sell parts, AMAZON may be all over it ;-) Very simple, they just need to buy a small online part store, expand, and sell parts for much cheaper. This is AMAZON's way of business.

Mar 11 10:11 AM

[notazoner:]

Have a look. Amazon already sells auto parts.

Mar 11 11:32 AM

[Kevin_S:]

Then I smell trouble for Auto Part Stores going forward (1-2 years). People didn't buy electronics online that much 3 years ago, and look now.

Mar 11 12:55 PM

[Arroway68:]

Um.....the thing that sets Autozone apart from folks like Amazon (or Walmart for that matter) is specialized *knowledge*.....

DIYers like having someone help hold their hand, tell them what to buy, help them look up data on their specific car/parts/issue....and last I checked Amazon.com couldn't diagnose an engine light over the net :)

(Although a subsidiary of Autozone can - AllData)...

:)

Mar 16 05:27 PM

[ArkOutlaw:]

I really think every one needs to look at a very underestimated rival of AZO that would be O'Reilly Auto Parts (ORLY). This auto parts retailer has a very unique bussiness model. They strive for a duel market stratagy in servicing the DIFM markets and DIY markets with great success. After the accusition of the Phoneix, AZ based CSK chain of stores, which where in essence border line bankrupt, this puts ORLY into markets that AZO has had free reighn to rake in better than normal profits. Now ith this rival going west with their Duel Market statagy will do nothing but take more market share from AZO and lower their bottom line. Also Advance Auto Parts has been on a tear latly closing stores all across the midwest as well as falling back on expansion plans.
I truly think that O'Reilly's will be the ultimate winner in the battle of The Auto Parts sector.
At a price in the mid to low $30 range this is a true steal to BUY!

Mar 17 09:04 PM

[boisterousbob:]

Well this stock has had a heck of a run up.

My view is that if we go into a sustained rally money will come out of this stock because (1) there will be lots of opportunities elsewhere and (2) the premise of this stock is that everything else is week.

If we go sideways in the overall market, this stock is still looking overbought short term.

For a short term play (disclosure) I am short April 165 Calls and Long April 170 Calls as a hedge.

Rather than shorting the stock outright this trade (currently paying about $2.25) is a bet that AZO will not continue it's breathtaking pace up for the next few weeks, and will instead go up slowly, or go sideways, or go down.

Mar 19 11:14 AM

[tradealarm:]

You got the point. AZO has too high leverage.


On Mar 08 05:00 PM Pj568 wrote:

> Seems like a reasonable short as the AZO buyback policy has levered
> up the balance sheet to 85x with no working capital and 300M of debt
> due this year. Don't understand why they want to take this gamble.

Mar 28 02:00 AM

[tradealarm:]

AZO is not a well-run company at all. Its inventory kept on increasing(in million US$)
* 1,663.86/2005
* 1,846.65/2006
* 2,007.43/2007
* 2,150.11/2008


On Mar 09 02:45 PM TBill wrote:

> Yup, you are crazy. Well, not all that crazy as you said for long
> term investors to keep the stock. Who knows where it will go short
> term?
> AZO is a well run company, doing a much better job than PBY. [Shorting
> PBY might be a good hedge for AZO.]
> I've owned it for a while, very happy with it, but due to market
> conditions have sold out of the money calls on it. Keep watching
> the top and bottom lines. As long as the numbers hold up, keep the
> stock.

Mar 28 02:19 AM

[Dan Schmeidler:]

Thank you for the mention, Brian. Feels like swimming upstream these days. Just based on the many resistance points broken, the market seems to be trading on technicals lately. Of course, AZO's resistance would be to break (more) all-time highs. But still, I just can't see how one can be a buyer of this stock.

Mar 29 05:18 PM

[tradealarm:]

Let's see major holders of AZO at Yahoo!Financial. Institutions hold 108% of float shares!!! Short squeezed? Absolutely!

* RBS PARTNERS, L.P. hold 40.67%, 23,370,297 shares. This hedge fund is backed by billionaire Edward Lampert.

Short interest rate are so high that this offers market maker a good chance to squeeze your short position.

* Shares Outstanding5:54.69M
* Float:54.08M
* Shares Short (as of 10-Mar-09)3:6.22M
* Short Ratio (as of 10-Mar-09)3:2.8
* Short % of Float (as of 10-Mar-09)3:11.50%


On Mar 08 09:45 PM texas6006 wrote:

> All these things could have been said about AZO 3 months ago. You
> did not even mention that this Company has the worst balance sheet
> ever, loaded with debt in this tight credit environment. The fact
> is that it keeps defying gravity because everyone knows what is wrong
> with the Company and take the same (sell) side amd we end up with
> too many shorts. My March puts are expiring worthless in this kind
> of market. That is just insane.

Apr 08 10:25 AM