AZO - A Trading Opportunity Emerges In AutoZone

2023-05-23 12:07:44 ET

Summary

• We last guided you to buy AutoZone stock if it dipped to under $2400, and would love it the closer it got to $2300. We have owned since $500.
• Well, a few months ago you got your chance to buy as AutoZone stock fell back to nearly $2300.
• After a massive rally to nearly $2750, AutoZone stock looks set to fall back under $2500, where it sets up for a trade once again.
• Q2 was still strong, but some weakness in March led to some revenue softness, but the amazing buyback story continues here and EPS continues to ramp.
• AutoZone is a must-own long term, and while the current price has us at a hold rating, the stock is a buy on the dips per our trade prescription below.

AutoZone, Inc. ( AZO ) is still one of our favorite long-term holdings. The story simply has not changed. We love AutoZone because the company is a compounder that reinvests cash back into the business, grows reliably every year, is expanding internationally, and has a ridiculously strong buyback program that increases earnings per share year after year, building shareholder value.

A few months ago, we guided a trade that suggested waiting for AutoZone, Inc. stock to dip under $2400, and to buy heavily the closer it got to $2300. Like clockwork, it approached $2300 within a few dollars and proceeded to offer about a near 20% return in two months on the trade. We believe the stock is offering you another opportunity to buy on today's decline.

The play

We know AutoZone, Inc. stock is expensive, so if it means buying only a handful of shares, or even fractional shares, so be it. But you w ant to own this name .

Target entry 1: $2525 (25% of position)

Target entry 2: $2475 (35% of position)

Target entry 3: $2420 (40% of position)

Target exit: $2750

This approach allows a full position to be had. Unlike most of our trade setups, we are not recommending a stop loss, as the EPS ramp will continue into the future. Options traders can consider long-dated calls, but the exact guidance on strikes and time frame are only provided to members of BAD BEAT Investing, where trades above backed by research, along with options suggested are provided.

Discussion

AutoZone, Inc. stock is always a buy on big declines in our opinion. We think this market is giving us another dip into the spring. Sub-$2,500 is a nice entry. A recession may be brewing, and this could lead to a brief slowdown for AutoZone, despite being somewhat recession-resilient.

However, you want to own a stock like AutoZone, Inc. It is too good to ignore. This remains one of the most rewarding stocks to own long-term. Let AutoZone, Inc. stock come down and do some buying. Let us discuss the just-reported results , driving this decline today.

Fiscal Q3 results

In its fiscal Q3 , AutoZone set another Q3 record with sales of $4.09 billion, which was a strong 5.7% year-over-year increase. It was a very slight miss versus consensus analyst estimates by $30 million. This was below Quad 7 Capital's expectations for $4.15 billion by $60 million. It is a rare misstep by AutoZone, Inc., but is providing an opportunity for entry. We have had our investors in the stock since the stock was trading at $500-$600. Nothing like 4-5X gains in a few years. This is a stock you want to own.

With that said, we continue to believe the key metric you should focus on for AutoZone, Inc. is comparable sales. Comparable store sales were up 1.9% in the quarter. This is a bit slower growth and was driven by a weaker-than-expected March. There were some weather-related issues that reduced foot traffic, and it did impact results in the Midwest and California.

We like that the company is growing sales while controlling expenses, particularly those impacting gross margins. This is a tough inflationary environment on parts and, of course, labor. We expect margins to face pressure in 2023, but parts costs should normalize while much of that can be passed entirely to the consumer. AutoZone managed to deliver gross margins that were better than we expected, despite inflation pressures.

Profit margin was 52.5%, which is strong and increased from a year ago by 56 basis points. This was also up about 20 basis points from the sequential quarter. Freight costs remain high, but the company is managing well. The company reduced operating expenses as a percentage of sales by 10 basis points, to 31.5% from 31.6% last year. It was also down significantly from the sequential quarter's 34.1%. Operating profit increased to $858 million, a 9.3% increase from a year ago.

So overall, while sales were a touch light, margins were strong, and it led to net income for the quarter increasing 9% from last year, following operating profit higher. Net income came in at $647.7 million. When you factor in the reinvestment of cash to repurchase and retire shares, on top of the net income, EPS increased 17.5% to $34.12, surpassing our expectations by $2.12 per share, and surpassing consensus by $2.83. The stock and company are a winner.

Looking ahead

As we look ahead, we are bullish on AutoZone, Inc. If the economy does weaken, consumers will fight to keep their cars on the road longer. We are still projecting for the entire year 2023 comparable sales growth of 5%-8%. Further, AutoZone will strategically open new shops to fuel future growth. The new store openings will help revenue grow, while existing store comparable sales continue to grow.

You know we love the buybacks, and in this quarter AutoZone repurchased 356,000 shares for $908.2 million in fiscal Q3, at an average price of $2,551 per share. At the end of Q3, there was $843 million remaining under its current share repurchase authorization. You can bet the board authorizes another program.

With the increasing per share earnings power, we think a dip under $2,500 is a solid entry point for AutoZone, Inc. in our opinion. It is a great buying level because we see EPS for fiscal 2023 growing. Use this weakness and buy.

Take-home

AutoZone, Inc. is an expensive stock. We offer options suggestions for our many service members for names like this, but you can do well in commons. We think you want to own this one. Right now, AutoZone, Inc. is a "HOLD" until the price level gets to where you can buy. AutoZone, Inc. stock is a tremendous long-term investment. Buying now will likely result in strong gains 6-12 months from now.

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