AutoZone (NYSE:AZO) released its Q1-2015 results yesterday, reporting its 33rd consecutive quarter with double-digit growth of earnings per share (EPS). As the market rewarded the stock with a 4% boost for its excellent performance, the question is whether the current stock price still represents a good entry point.
First of all, the report was spotless once again, from top to the bottom, just like most recent quarterly reports. The company increased its revenue by 8% over last year, with its same-store sales up 4.5% (vs. 2.1% in Q1-2014). Moreover, its earnings increased 9.3% and its EPS rose 15.6% thanks to the aggressive share buyback program of the company. The numbers are very close to those reported in most recent quarters, which confirms that there are no signs of fatigue in the company's unique streak of 33 consecutive quarters and there is still ample room for the company to keep growing at the current pace. This is facilitated by the high fragmentation of the commercial segment of the company, which is a $60 B market, with AutoZone's market share currently standing at just 2.5%.
While the company has exhibited excellent performance even in the environment of high gasoline prices in the last 4 years, it currently faces a strong tailwind thanks to the recent plunge of gasoline prices. As the gasoline price falls, consumers tend to drive more miles and hence their cars require repair and maintenance more often. As mentioned in the conference call, the average gasoline price in Q1 was about 10% lower than last year and the driven miles in September increased 2.3% over last year (no available data for October yet). Therefore, if low oil prices persist, they will provide an additional boost to the company's earnings. This means that AutoZone is a stock that investors should consider in order to balance their portfolio, particularly if they own some oil stocks, which are severely hurt by the low prevailing oil prices.
When AutoZone reports its results, analysts always pay attention to its inventory rise. Unfortunately, the company reported an 11.3% increase in its inventory over last year. However, the pronounced increase was in part caused by the acquisition of IMC. If one adds the 8% increase in revenue over last year, then one can conclude that the reported increase in the inventory is probably acceptable.
Finally, the company reduced its share count by the expected 6% over last year and is poised to maintain its aggressive share buyback program, which has eliminated about 80% of the outstanding shares since its inception in 1998. As the company has recently started to execute its share repurchases using only its net income (not with issuance of new debt), investors can expect an annual 6% reduction in the share count, as long as the stock keeps trading at a P/E 14-18.
The stock currently trades at a forward P/E=17, which is not cheap but is equal to the P/E of the market. Taking into account that AutoZone has been growing its EPS at a predictable rate of about 15% per year, it seems that AutoZone is still a great investment, with limited risk and predictable upside. As the stock tends to consolidate in a tight range for a long while only to break up to new highs on some catalyst, investors should exhibit patience with this stock and wait to receive their annual 15% profit at some point. For instance, AutoZone traded within the range $500-$550 for 8 months this year and broke up to new highs after its peer O'Reilly (NASDAQ:ORLY) reported its impressive quarterly results in the end of October. In today's fully valued market, a 15% annual yield with such a great consistent record is definitely remarkable and deserves the attention of investors.
Disclosure: The author is long AZO.
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