With the Dow losing 1000 points last week, then another 600 on Monday, shares of AutoZone (AZO) were being touted by brokerage firms. With the shares around $700 the past couple of days, AZO is selling for around what it did from April through July. AZO didn’t really break past $700 until a couple of weeks ago, when it shot to $750 on the back of O’Reilly’s good earnings report.
I think the brokers did a good job selecting AZO for clients with the market in turmoil. Miles driven are up around 3% through May, and that will lead to more auto parts. And auto parts retailers are good selections during tough times as people will repair their old cars instead of buying new ones. But with the current quote of around $700, the stock’s selling for 17 1/2x earnings. AZO is a 13% grower that doesn’t pay a dividend, so 17x sounds about right for this stock. That being said, I don’t see the value in buying this stock, as every other stock out there has been hammered by the stock market correction and you’re sure to find some better deals somewhere.
Ten Year Chart
Here’s the ten-year chart of AZO. I wish I would have purchased this a long time ago, but was under the impression AZO was a low-teens grower. Management has done a brilliant job acquiring other companies, improving on its own efficiency, and most importantly buying back shares. From 1998 to 2014 the company has reduced its share count from 160 million to 30 million. That’s been great for EPS, but has created a lot of debt and ballooned the accounts payable. But really, does that stuff matter anyway? It’s all about the profits.
I feel the recent surge the stock’s made in the last year is too-much, too fast. AZO was $500 last October.
Profit History
In the Profit History table you can clearly see this stock used to have a P/E of 13 to 15 almost every year Only in 2014 did the P/E spike higher.
AZO has its fiscal year-end August 30th and I’m already calculating its P/E ratio using the 2016 estimate of $40.35. A P/E of 17 on $40.35 in profits gives us a Fair Value of $686. So with the stock hovering around $700, I don’t see the value.
Sharek’s Take
AutoZone is a 13% grower selling for around 17 1/2 times earnings, which is a little high for what the stock usually sells for. Still, this is a quality company that delivers profit growth each year and has solid management. It’s is a good selection for conservative buy-and-hold investors but growth investors should wait for a bigger pullback as the stock’s within 10% of my 2017 Fair Value.
