AutoZone Funding Thesis
I lined AutoZone final time (NYSE: AZO), a best-in-breed auto elements retailer in Could of 2021, and since then the inventory has outperformed my estimates, by greater than 35%. It isn’t with out warrant, as The corporate simply exceeded each income and EPS expectations within the following quarters. Moreover, enlargement in Latin America, progress in DIFM, and additional growth of Mega Hub will allow accelerated top-line progress. AutoZone’s free money circulate additionally stays sturdy, which helps its aggressive buyback program. Accordingly, I’ve elevated my worth goal on the inventory to $2,600/share.
what has occurred since could
I printed my final article on AutoZone on Could 17, 2021, and the corporate has proven commendable efficiency within the following three quarters. Persevering with a powerful streak from Beats, AZO grew ~20% every quarter on the top-line and ~8% in income every quarter.
Based on Looking for Alpha, this resulted in 16 upward EPS corrections by analysts and 0 downward, which bodes properly for the long run.
TTM additionally continues to develop in free money circulate to $3 billion, up 3.71% over final 12 months (needless to say AZO has solely reported Q1 to date).
firm growth initiatives
In quarterly convention calls, administration at AutoZone has repeatedly acknowledged two main progress initiatives: enlargement in Latin America, progress in do-it-yourself (DIFM), and growth of so-called mega-hubs.
Enlargement to Latin America
The principle driver of AutoZone’s progress in Brazil and Mexico can be a rise within the variety of shops. The market in these two nations is much from saturated, and a few simple arithmetic may assist reveal what Azo’s footprint may finally appear like there. By my estimation, the variety of AutoZone shops in the US is about 1 per 55,000 individuals. In Brazil and Mexico, it’s nearer to 1 in 480,000. Even with the US accounting for the low variety of automobiles per capita in these two nations, you continue to attain a possible market measurement of about 2,000 shops. At $1.85mn in common income per AutoZone retailer, Latin America may in the end contribute $3.7bn to AZO’s top-line.
Whereas AutoZone is called the go-to place for do-it-yourself (DIY) repairs, they’ve grow to be a pressure within the DIFM sector as properly. For these individuals, the distinction between DIY and DIFM is that DIY is the person shopper, whereas DIFM is geared to restore outlets.
In the latest quarter, AutoZone reported that DIFM grew 29.4% on a year-over-year foundation, and 41% on a two-year stack foundation to $900mn, or 25% of whole gross sales. That is unimaginable progress and is pushed by what administration calls a “extremely fragmented share of the market.” AutoZone is strengthening this section and I’m positive that this section will proceed to develop.
AutoZone separates its shops into three teams: Satellite tv for pc Shops, Hubs and Mega Hubs. Historically, AutoZone focuses on satellite tv for pc shops (they carry ~20,000 SKUs). They’re now pushing hubs and mega hubs as a result of they’re extra environment friendly and drive increased gross sales, providing a wider choice (4x greater than satellite tv for pc shops). CFO Jemare Jackson stated it greatest on the Q1 2022 convention name:
As a reminder, our mega hubs sometimes maintain round 100,000 SKUs and drive large gross sales progress inside the shop field in addition to function a success supply for different shops. Increasing protection and elements availability continues to offer a significant gross sales progress for each our business and DIY companies. And we’re testing a larger density of Mega Hubs to drive even stronger gross sales outcomes.
AutoZone at the moment has 62 mega-hubs, and plans to extend that quantity to 88 by the tip of their fiscal 12 months (AZO’s fiscal 12 months ends on August 28). I count on this to assist drive AutoZone’s income progress with their 2-5% top-line progress and the historic vary of analyst expectations.
Share buyback program nonetheless going sturdy
As I highlighted in my earlier article on Ezo, AutoZone’s share repurchase program has considerably elevated shareholder worth. AutoZone has continued this technique, with the announcement of two $1.5bn improve in share repurchase authorization (equal to six.9% of the shares), bringing the overall quantity approved for repurchase since going public to $29.2bn.
I count on this repurchase program to proceed at a >$3bn annualized tempo, as administration has proven no indicators of slowing down, and took incremental leverage as properly to spice up buybacks past simply free money circulate can go.
Supply: Writer’s personal work with some information sourced from Tradingview
I have a look at AutoZone valuations in 3 ways: relative, on a DCF foundation, and inversely on a DCF foundation.
On a relative foundation, the addition of AutoZone Superior Auto Components (AAP) is marginally underpowered, at 15.8x EV/FCF, in comparison with the upper-teens numbers for its closest friends.
Evaluating worth and progress by way of Value to Incomes Progress (PEG) ratio, AutoZone appears engaging at 0.587x; It’s decrease than all its counterparts besides the superior auto half.
Discounted Money Move Mannequin
In my mannequin, I assume annual free money circulate progress within the 6% vary, pushed by the above components. Returning these money flows to AZO’s weighted common price of capital (5.33%), I discover that the current worth of their future free money flows by way of 2026 is $14.28 billion. I selected a terminal multiplier of 15x 2026 FCF and added it to the money circulate whole. After subtracting the online long-term debt, I arrive at an intrinsic worth of $54bn, or ~$2,600/share. That is 24% increased than the present share worth.
Utilizing the identical low cost fee and terminal a number of assumptions within the DCF, it seems that the market is pricing in a -0.5% improve from TTM free money circulate of $3.0bn over the subsequent 5 years.
I extremely doubt that AutoZone is not going to develop earnings in any respect for the subsequent 5 years, and this implies that the upside may very well be within the coming months.
Supply: Writer’s personal work with some information sourced from Macrotrends
Autozone, the primary threat dealing with electrification, hasn’t developed a lot since my final article. The arrival of easier, electrical, automobiles continues to be a query mark for AutoZone, as ICEs in EVs make up a fraction of the car’s shifting elements. Nevertheless, I imagine that electrical autos is not going to have a significant affect on the AutoZone for the subsequent decade on the earliest, as they’re nonetheless not extensively adopted.
Briefly, AutoZone is a superb auto elements provider with important tailwinds behind it, which ought to propel its income progress above historic limits and beat analysts’ expectations. Regardless of the large soar in these shares over the previous twelve months, I would not be afraid to take a starter place on this compounder.