Kelev's  Instablog

Going back to October 2008, Autozone (NYSE: AZO) has outperformed the S&P 500 by almost 50 percentage points. In terms of the stock price, AZO has been rock solid as a perceived safety stock. Aftermarket auto parts have held up well in the economic downturn as more drivers keep and maintain their existing cars instead of buying new ones.

Autozone is the largest publicly-traded auto parts retailer, and they compete with the likes of Advance Auto Parts (AAP), O'Reilly Automotive (ORLY), and Pep Boys (PBY). AZO's market cap is around $8.4 billion. The actual valuation of the company is a little more tricky, however.

A quick look at the balance sheet reveals:

Liqudity: $234 million in cash and receivables

Liability: accounts payable: $2.1 billion; short-term/current debt: $456 million; long-term debt: $1.9 billion

The balance sheet also shows negative book value. A weak balance sheet can typically be overlooked if a business generates a lot of free cash flow. Autozone, however, has only generated $954 million in cash flow (ttm), of which 1/3 automatically goes to servicing debt.

Despite the illiquid balance sheet, the board of AZO recently authorized $500 million in share buybacks. Normally share re-purchases are music to investor's ears, but at what cost? The company appears insolvent on paper and yet they are scooping up their own shares at inflated prices.

Good luck to all traders of AZO.

Disclsoure: Short AZO