This auto parts supplier beat analysts’ estimates by a whopping $1.53 per share last quarter.
AutoZone, Inc. (AZO)
From Sure Dividend
AutoZone, Inc. (AZO) is the leading retailer of auto parts and accessories in the U.S. It currently has 5651 stores in the U.S., 568 stores in Mexico and 22 stores in Brazil.
AutoZone has an exceptional growth record. It grew its earnings-per-share at a double-digit rate for 41 consecutive quarters until early 2017. The company has essentially quintupled its earnings-per-share in the last decade, from $10.04 in 2008 to $50.43 in 2018.
The commercial automotive aftermarket is a $60 billion business on an annual basis and is highly fragmented. While AutoZone has kept growing for years, it still has a market share of just 3%. It thus has ample room for future growth.
AutoZone exhibited remarkable deceleration in 2017, when its multi-year streak of double-digit growth of earnings-per-share ended. Competition had intensified. As the market feared that Amazon was disrupting the business of AutoZone, the latter plunged 40% in just seven months.
However, the company has returned to its solid growth trajectory since early last year. It is growing its earnings-per-share, thanks to the opening of some new stores, low-single digit same-store sales growth, small margin expansion from economies of scale and aggressive share repurchases. AutoZone is poised to grow its earnings-per-share by about 21% in this fiscal year.
During the last five years, AutoZone has grown its earnings by 32% and its earnings-per-share by 81%. This shows that more than half of the bottom line growth has come from share buybacks. AutoZone has repurchased its shares aggressively, regardless of the prevailing economic conditions. Even in the Great Recession, when most companies suspended share repurchases, AutoZone reduced its share count by 23% in just two years. Overall, the company has reduced its share count by 75% in the last 16 years.
Moreover, AutoZone currently has a relatively cheap valuation, as it is trading at a price-to-earnings ratio of 15.3. While this is slightly higher than its 10-year average price-to-earnings ratio of 14.8, it is not expensive for a stock with such an exceptional growth record.
Thanks to these share repurchases, it is reasonable to expect AutoZone to grow its earnings-per-share by 10% per year over the next five years. In fact, the company has grown its earnings-per-share by 12.6% per year on average in the last five years. Therefore, the stock is likely to offer a 9.3% average annual return over the next five years thanks to 10.0% annual earnings growth, which will be partly offset by a 0.7% annualized contraction of its price-to-earnings ratio.
It is also worth noting that AutoZone is an ideal stock for those who are afraid of an upcoming recession. As new car sales plunge during recessions, the average vehicle age rises and thus AutoZone benefits during such periods. In the Great Recession, when most companies saw their earnings collapse, AutoZone grew its earnings-per-share by 18% in 2008 and another 17% in 2009. Thanks to its exemplary management, the company takes advantage of its depressed stock price during downturns and implements value-enhancing share repurchases.
Overall, AutoZone offers an attractive expected return regardless of the underlying state of the economy.
Ben Reynolds and Aristofanis Papadatos, Sure Dividend Newsletter, www.suredividend.com, ben@suredividend.com, April 15, 2019