AutoZone: A Blue-Collar Blue Chip

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Includes: AZO
by: TipRanks
Summary

Driving habits have changed over the last 10 years – people keep their cars longer.

The auto repair and maintenance sector is well-positioned to take advantage of this.

AutoZone has turned economic contraction to its advantage.

AutoZone, Inc. (NYSE:AZO) (AZOResearch Report) is the largest retailer of car accessories in the United States, with over 5,400 locations. The company also has more than 500 stores in Mexico and another 14 in Brazil. AutoZone stock has gained almost 50% since 2014 and currently stands at its all-time high, close to $900 per share. In addition to occupying the right business niche in today’s car industry, AutoZone’s stock has been helped along by a recent good quarterly report, and a general sentiment that this is a stock with high potential.

Americans’ driving habits have changed over the past decade. During and after the financial crisis of 2008, people started deferring their car purchases and keeping their older cars on the road longer. The average age of the cars on America’s highways had risen to 11.6 years by 2017. While this has become an ongoing problem for auto manufacturers and their dealers, it’s been a boon to dealers in after-market car parts. AutoZone in particular has gained on the boom in automotive repair parts and accessories for do-it-yourself maintenance. I have found that do-it-yourself, as a niche, tends to perform well in a defensive portfolio.

Sky-High Earnings

Earlier this month, AutoZone released its Q1 FY19 report. The news was unequivocally good – the company beat the expectations on both revenues and earnings. Expected EPS was $12.21; the reported earnings were 10% higher, at $13.47. Revenues came in a $2.64 billion, edging past the estimates by 0.19%. Last year’s Q1 report showed revenues of $2.59 billion.

When looking at AutoZone’s EPS, it’s important to remember that the company only has 27 million shares outstanding, relatively few for a major company. I’ve found that companies with a comparatively small number of shares outstanding tend to show an inflated EPS. Inflated or not, $13.47 per share is a great earnings report. AutoZone has a policy of share buybacks, to keep the EPS high as a reward to investors, turning their fairly low share number to their advantage.

Checking in with the Analysts

The company’s strong performance and loyalty to shareholders has attracted the analysts’ notice. Last week, Zachary Fadem (Track Record & Ratings) of Wells Fargo reiterated his ‘Buy’ rating on AZO stock and set his price target at $970. In his comments on the stock, he said, “We are raising our FY19/FY20 EPS estimate by $1.34/$0.12 to $59.01/$62.34.” Fadem has an 80% success rate when recommending this stock, with a 25% average profit.

Oppenheimer’s Brian Nagel (Track Record & Ratings) also reviewed AZO, noting the overall favorable position of the company’s stock but particularly that the company has an excellent opportunity to expand its business and customer base: “In our view, still lacking penetration in the professional market represents a meaningful opportunity for AZO, particularly with underlying demand dynamics for the sector strengthening steadily.” Nagel did not set a specific price target, but expects this stock to outperform the market.

Finally, UBS’ Michael Lasser (Track Record & Ratings) raised his price target on AZO, boosting it from $860 to $1,005. His new target represents an upside potential of 13.6% over the current share price.

That boosted price target is an important point to note. The current average price target, $899, is only 1.5% above the share price. I have found that this situation generally indicates a stock that is showing rapid changes, and has reached or outpaced the analysts’ forecasts. We should watch AZO carefully over the next few weeks; it’s likely that the analysts will reach a new average target price.

For now, the analyst consensus, based on 16 reviews, is a ‘Moderate Buy.’ The reviews included 6 ‘hold’ ratings. Along with my point above, about AZO hitting its price target, note that 8 of the last 10 ‘buy’ ratings have come during the last three weeks – the sort of bullish sign I look for.

A Very Bullish Case

AutoZone shows important features in a bullish stock: a price target that is high and rising, and an earnings potential that makes the high cost of entry worthwhile. While past performance is no guide to future returns, I can’t help but notice that AZO has gained 20% year to date, outperforming the markets by a wide margin. With winter coming up, the aging cars on the road will need increased maintenance; this time of year is normally AutoZone’s busiest season. All in all, the bulls should be happy with AZO.

Author: Michael Marcus

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.