Description
AutoZone has operating profit margins, after-tax margins, and sales growth rates in excess of GE. It is rightly considered a low-growth cash cow, but incorrectly perceived as mismanaged, and unable to respond to the assault by legitimate competitors. New management, installed in 2001, redirected the Company from growth by acquisition to assiduous cost reduction -- and aggressive share repurchases. The result has been excellent margin expansion, rediculously high ROE, and high rates of EPS growth. The stock market has been unimpressed, choosing to focus instead on same-store-sales growth in the critical do-it-yourself market.
AZO operates about 3300 stores selling products to the car repair/ maintenance market; last twelve month store count increased by 202 (151 in the last quarter), 17 of which were in Mexico. Late 29 June the Co. announced that quarter-to-date SSS were down 1%, with retail declining 3% in the same 7 wk period. Analyst estimates had predicted up 2% and 1% repectively. In the LTM, sales have risen 1%, going back to F2002/8 (when it was 4%). I would like to posit a neat earnings model which might shed light on the next twelve months -- but there are simply too many moving parts, the product of which is essentially salami slicing (but this may be my limitation as an analyst). SSS growth, I submit, may be the least important variable, with share count and margin expansion emerging as more relevant. The explosion of automobiles and light trucks sold in the US, and the large number of cars over 6 years old auger well for a growing market the co estimates at $48b, growing at 4% p.a.; pay-on-scan inventory management, growth in the do-it-for-me market, and alliances with providers like Midas suggest that ASP will increase, while the "old" store base requires very little cap ex. The co has an ATM target of 15%, and will continue to repurchase shares, if necessary until "there is one share outstanding". ESL owns 24% of the stock. A few metrics:
ltm ATM= 10.0%
EV/ ltm CF= 8.8x
OPM= 17.7%
int cover= 11.0x
(LTD+OLL+PBO)/ EBITDA = 2.1x
avg life= 8.1yrs
cap ex/ dep= 1.8
a/r DOH= 4
a/p DOH= 161
WC/ sales= -.8%
ROI= 23.4%
ROE= 131.0%
last 5 qtr sales growth= 4%
Catalyst
Accelerated stock repurchases at lower prices.
Re-emergence of sales growth as management responds to investor concern.
ESL becomes more active; they own 19.9m shs.
Investors credit execution that is superior to competitors'.