Description

AutoZone is the nation's largest auto parts retailer with approximately 2,700 stores focused on the do-it-yourself car owner. AutoZone has established a brand name amongst its loyal customers and is leveraging this recognition by aggressively consolidating a fragmented industry. AZO is a $3 billion market cap company, which over the last ten years has shown strong growth, averaging 37% EPS Growth, 22% revenue growth and 18% store growth, but hasn't been rewarded with a market multiple. The company is currently trading at 12.6x trailing earnngs and 11.1x fiscal year (August year-end) earnings, a significatn discount to the S&P 500's 28.0x earnings multiple. AutoZone trades at 0.7x revenues.

Management anticipates expanding its store base to over 5,000 locations within seven years. Over the last two years AUtoZone has made three major acquisisitons and management has spent much of its time, effort and resources on converting and integrating these units to AutoZone's standards. These stores are now fully converted allowing management to concentrate on expanding the company's other businesses and growing its bottom line. These plans include expanding its commercial program of selling directly to national and local service stations and repair stores, growing its e-commerce program and expanding internationally.

Additonally, AutoZone will benefit from macroeconomic issues such as the new car cycle which swelled beginning in 1994 and will provice AZO with an expanding supply of aging cars for the forseeable future. AZO is also one of the rare companies whose businesses should actually improve in tough economic times.

Corporate insiders have deimostrated their belief in the company's prospects as fifteen insiders have purchased over $4.7 million of stock since last July. This is particularly noteworthy, as it is the first concentrated buying in the stock in over three years.

I believe that AUtoZone offers exceptional risk/reward parameters with limited downside and given a 20% discount to the S&P 500's earnings multiple a price target of $44 within twelve months.

Catalyst

Catalysts for the stock include an aggressive share repurchase and an activist shareholder who controls approximately 15% of the company. Ed Lampert of ESL Partners was recently elected to the board of directors and has promised to shake up the close-knit board and deliver value to the company's shareholders. ESL has received regulatory approval to acquire up to a 24% ownership in AutoZone.