One doesn’t necessarily need to exclusively center attention on the tech giants like the “Magnificent Seven” to unearth profitable stock prospects. AutoZone (NYSE: AZO) stands as a testament to this, with its shares surging by an impressive 230% over the past five years (as of Feb. 29), outperforming the S&P 500 by a considerable margin.
Consider adding this auto parts retail stock to your portfolio, anticipating robust momentum that could translate into noteworthy returns. However, before taking that step, here are three essential insights to grasp about the workings of AutoZone’s business.
1. Strong fundamental performance
The impressive performance of AutoZone’s stock is underpinned by its robust fundamentals. Over the last decade, the company has exhibited noteworthy annualized growth rates, with revenue and net income expanding at 6.8% and 10.3%, respectively. Even in the face of recent challenges, including the COVID-19 pandemic, supply chain disruptions, inflationary pressures, higher interest rates, and economic uncertainties, AutoZone has consistently demonstrated growth in both sales and earnings.
Long-term prospects for the company appear promising for several reasons. Firstly, the industry’s highly fragmented nature provides a substantial advantage to a scaled operator equipped with ample inventories and efficient distribution capabilities, setting it apart from smaller competitors.
Moreover, AutoZone benefits from the ongoing trend of increasing miles driven each year and the aging of cars on the road. As vehicles spend more time beyond the original manufacturer’s warranty, the business stands to gain. These factors collectively contribute to a positive outlook for AutoZone’s future.
2. Buying back shares
Despite its mature status, AutoZone identifies opportunities for expansion by opening more stores both domestically and internationally, leveraging its robust profits to fuel these growth initiatives.
Capital allocation priorities for the management team underscore the significance of share repurchases. In fiscal 2023, the company generated $2.1 billion in free cash flow but allocated $3.7 billion toward buying back outstanding stock.
This commitment to share buybacks shows no signs of slowing down. According to CFO Jamere Jackson during the Q2 2024 earnings call, “At quarter end, we had just over $2.1 billion remaining under our share buyback authorization.”
The long-term trends in this regard are truly remarkable. Since the inception of fiscal 2014, AutoZone has successfully reduced its outstanding share count by an impressive 51%. This reduction directly contributes to the positive trajectory of earnings per share, which has exhibited a compound annual growth rate of 17.8% between Q2 2014 and Q2 2024.
Investors stand to benefit from the leadership team’s strategic decision to repurchase stock, especially given the stock’s appealing forward price-to-earnings ratio of 19.7.
3. Durable demand trends
Over the past year, there has been an unprecedented focus on the state and trajectory of the economy, with looming questions about the possibility and severity of a recession. However, for shareholders of AutoZone, the macroeconomic landscape holds less significance.
AutoZone has established itself as a recession-proof entity. In times of economic downturns, when consumers are less inclined to purchase new vehicles, the company excels. Instead, individuals choose to invest in prolonging the useful lives of their existing cars, a scenario where AutoZone and its 6,332 nationwide stores excel.
Interestingly, even during economic upturns characterized by low interest rates and robust consumer spending, AutoZone continues to thrive. In such situations, increased driving leads to additional wear and tear on vehicles, and AutoZone steps in by providing the necessary merchandise to keep consumers on the road.
By showcasing resilience regardless of the macroeconomic backdrop, AutoZone provides its shareholders with a valuable sense of security. Armed with a deeper understanding of AutoZone’s business dynamics, investors can confidently make informed decisions about the stock.
