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AutoZone: About Goldman Sachs's $715 Price Target

Jul. 12, 2017 12:06 PM ETAutoZone, Inc. (AZO)37 Comments


  • On May 30th, Goldman Sachs strongly defended the dip in shares of AutoZone.
  • Goldman Sachs's rebound calls have proven to be "early".
  • O'Reilly Automotive's July 3rd lower-than-guidance Q2 same-store sales have led to the recent leg down in the sector.

This article first appeared on my premium site, Market Adventures. It was published there on June 13th, at 6:21 AM.

On May 23rd, AutoZone (NYSE:AZO) reported disappointing earnings results. Driven by slower growth and an ugly negative 80 basis points same-store sales figure for Q3, shares were down sharply. As readers are aware, this second back to back underwhelming miss prompted me to buy a mighty 1 ORLY August 2017 $230 put contract for $7. I wanted to buy an AZO put(s), but given the $600 share price, even one put option was prohibitively expensive.

Lo and behold, on May 30th, the “great” Goldman Sachs defended the stock with a $715 price. If you didn't already know, as a general rule, I tend to do the exact opposite of whatever GS is recommending.

As an aside, a friend of mine had been pitching me shares of Micron (MU) earlier in 2017 when shares were trading at $17. He was long was a boatload of MU calls and nailed the call. That said, I'm not really a technology investor, per se, so the name never intrigued me, given the past highly cyclical memory chip boom and bust cycle of years past. He argued that this time is different as market has become a global oligopoly with only four players. My bandwidth is often constrained, so I never got a chance to truly kick the tires myself, as I'm done buying anything blind anymore. My long-winded point is that when MU shares experienced profit taking after the March 23rd earnings beat, he was steadfast that he still loved it and that it was worth $33-35. Again, I was slightly skeptical but didn't get a chance to kick the tires. However, on May 8th, when Goldman downgraded shares at $28, I knew my friend was right, and I almost bought shares that day solely because of the GS downgrade. Lo and behold, MU shares recently hit $32.93

This article was written by

A career wanderer and journeyman, with a passion for deep value and contrarian investing. I spent five years on the buy side in investment grade bonds on a team that managed $50 billion of assets, 3.5 years as an energy credit analyst for an energy company, and had multiple stints in corporate finance, most recently as a strategic financial analyst. I have an undergraduate degree in Finance (UMass Amherst) and earned an MBA (Babson College).

I actively invest my own capital and for a few family members.

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Comments (37)

getalife! - any comment on today's downgrades? Not an expert in Automotive Aftermarket but from investment banking experience and seeing AZO, ORLY and AAP stores open on top of each other where I live, consolidation is the likely outcome. High debt may accelerate timing. Will wait until then to see who will be the successful consolidator.
Courage & Conviction Investing profile picture
getalife! - Got to love sweeping statements that are super vague. Please enlighten us with your expertise : )
Concerning to see so many uniformed opinions on AZO and the Automotive Aftermarket in general. I can only hope even less informed investors do not rely on the commentary provided here regarding the future of this incredibly consistent performing sector and AZO specifically.
Anybody think GS wants AZO's M&A business? Results of AZO, ORLY and AAP will remain slow due to secular and competitive reasons. Consolidation will be the only alternative. Synergies are huge with stores, management and administrations rationalized. May take 1-3 years but with continued operating and financial pain it will happen.
Keep on Investing profile picture
How can a PE ratio of 187 be maintained with zero margins?
Jonathan Loewer profile picture
You are right, Keep on Investing... Likewise, I say the same thing about MANY unprofitable companies that have only turned a profit once or twice since before the Great Recession, but still somehow maintain a high market cap and continue to sucker "dumb money" into investing in them.
Courage & Conviction Investing profile picture
Goldman Sachs: Reiterates "Sell AMD" on June 12th when AMD was $12.


AMD is now over $14.......

See a pattern yet?
MFITZ profile picture
If I was Jeff B I wouldn't waste any time with the food industry (tragic margins soon to be made even more tragic by Aldi and Lidls new models in the US).

I would have a big chart on my wall with the auto parts (and auto dealers).

Huge margins, large average selling prices, ancient structures.

Heaven for AMZN.

I keep reading about the moats in this industry. I would class them move like earthen ditches which AMZNs tank will just plough through.

TJX now looking like the last great asymmetric short in retail. Even if it holds up, it is not going to move its multiple higher regardlsss. Plus you have the wildcard of long overdue US recession as well.
fxfx profile picture
MFITZ, That's the group think these days. "AMZn will smash each and everybody, in any retailing business"
now, i have news for you: AMZN isn't the only guy in town to have figured out logistics 2.0 and how to streamline operations and use modern technology. And for all their size and might they have no magic bullet. They operate on razor-thin retail margins and still they are not at all offering always the lowest prices.
They certainly would undercut margins in the auto parts industry if they were to enter it on a meaninful scale, hammering profits for everybody involved. But they are far from an assured winner.
This is mostly a B2B business - AMZn is mostly B2C. And while joe sixpack may buy new bulbs at AMZn, a repair workshop may not be so keen on doing business with AMZn instead of an experienced, well-known dealer with a ton of expertise just for saving a few bucks here and there.
In short, the AMZN threat is there and for real, but it not an existential one for the auto parts industry.
Jonathan Loewer profile picture
"I keep reading about the moats in this industry. I would class them move like earthen ditches which AMZNs tank will just plough through." (chuckles) ... That is an awesome line, and it is very true. Auto parts (especially those for upgrades and routine maintenance that aren't urgent and can be ordered ahead of the time they are needed are absolutely the types of items that one should buy online. Clothing retail has been damaged severely by online, and they have the advantage of window-shoppers and to try on the fit before you buy, but nobody really impulse buys new-car-smell air fresheners, motor oil, or break pads (they may add new-car-smell air fresheners or tire-shine spray to their purchase while their in the store, but those are all items that can just as easily be sent to your door after you click "add to cart").
MFITZ profile picture

The greatest most that AMZN has' which is completely overlooked, (and has nothing to do with scale, logistics power etc) is that .....

..... it doesn't have to make any money.

It is the most under appreciated aspect of AMZN. Because AMZN is so worshipped, it trades as a x of Revenues. If AMZN's competitors could be valued like this, they would be much more competitive. AMZN just walks looks for internet traffic or big retail margins, enters with 0% margins and destroys competition. No other retail business can do this. They are all making good profits, selling on PEs of 10x, and selling out of physical stores (i.e. Need higher sale price to make same margin as AMZN). AMZN makes no profits even selling online and is worth hundreds of billions.

They have no chance.
somedata1 profile picture

Don't they have 4000+ stores? I don't know if they own the properties. But what it comes down to is long term business proposition. I just don't see the future for AZO or M. Yes, I'm a long term invester with no position in AZO or M.
Courage & Conviction Investing profile picture
somedata - these are leased stores. Macy's owns half of its store and their portfolio includes Class A urban real estate...
CapVandal profile picture
Autozone also owns half their stores.

Whose value is roughly the same level as their debt.

As far as Macy's -- that was the basis of the Lampert/Sears decade plus of disaster. That somehow real estate was going to make everything ok.

What is Macy's going to do with this 'Class A' real estate? If they sell it, they don't own it. Macy's stores are in malls. Not much mystery what's going on there. Before they run out of cash, they can do sale/leasebacks. If anyone wants to do deals on B&M mall based retail.
Courage & Conviction Investing profile picture


Fair point, on pg. 18 of AZO's 10-K.

What other purposes would the real estate of random AZO's have? What other type of stores would use the buildings?

How are you comparing these units to urban real estate?

Herald Square and its 2.1 million square feet isn't a mall. Some of Macy's prized urban real estate isn't in malls......
Courage & Conviction Investing profile picture
somedata - Does AZO own 2.1 million square feet in Manhattan? Does AZO own prized urban real estate through the U.S.? : )
somedata1 profile picture
AZO is going to be the next M.
Courage & Conviction Investing profile picture
MFITZ - if you look at the tale of the tape - the GS effect lasted for like one trading session. Buy is code for sell. Up is really down.
MFITZ profile picture
Very good article - so many mis-truths circulating these companies.

Goldman just doing the most profitable activity on Wall St - selling call options to traders on these stocks (they are top of Goldmans Weekly Overwrite letter), while the Goldman desk sells them short on the AMZN effect.
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