AZO - AutoZone Is A Buy On Big Drops

Summary

• AutoZone, Inc. is a stock we have been invested in since $500.
• The company beat on the top and bottom lines for fiscal Q2 2023.
• AutoZone saw impressive comparable store sales but also impressed on margins, all things considered.
• The stock's value improves every month, as more and more shares are repurchased.
• You will get a better price for AutoZone, Inc.

AutoZone, Inc. ( AZO ) remains one of our favorite long-term holdings. The company is a compounder that reinvests in itself, grows reliably, is expanding internationally, and has aggressive buybacks that increase earnings per share year after year.

This stock is always a buy on big declines. We had a nice dip in December, and we think this market is giving us another dip into the spring. Sub-$2,400 would be a nice entry, and if it got there again, $2,300 would be quite attractive. A recession may be brewing, and this could lead to a brief slowdown for AutoZone, despite being somewhat recession-resilient.

We love the company, and it has been one of the most rewarding stocks to own long term. We still like AutoZone, Inc. stock but rate it a hold over $2,500. Let it come down and do some buying. Let us discuss the just reported results , which were strong in our opinion.

Fiscal Q2 highlights

In its fiscal Q2 , AutoZone hit another Q2 record with sales of $3.6 billion, which was a strong 9.5% year-over-year increase. It was a decent beat versus consensus analyst estimates by $130 million. This was also well above our own expectations for $3.60 billion by $90 million. There is a reason we call this one "Old Faithful" over at BAD BEAT Investing, where we have had investors in the name since the stock was at $500-$600. We continue to think the most critical metric you should focus on is the movement in comparable sales, and let us just say, they were more than impressive. Comparable store sales were up 5.3% in the quarter.

The company does not just grow from those great buybacks, it manages to really grow sales, as evidenced by the near 10% rise year-over-year. Moreover they are increasing sales while controlling expenses, particularly those impacting gross margins. Now, margins are an issue for all companies. This is a tough inflationary environment on parts and, of course, labor. We expect margins to face pressure in 2023, as costs for labor do not seem to be abating, though parts costs should normalize while much of that can be passed entirely to the consumer. AutoZone managed to deliver gross margins that did get pressured from a year ago.

Profit margin was 52.3%, which is strong, but they dipped from a year ago by 69 basis points. The big driver of the higher costs was freight costs, along with more expenses that the company is incurring thanks to growth in its commercial line. The company reduced operating expenses as a percentage of sales by 30 basis points, to 34.1%. That is strong. Operating profit increased to $670 million, a 6.9% jump from a year ago.

Of course, with these positive metrics, net income for the quarter increased 1% from last year, following operating profit higher Net income hit $477 million. But due to the constant reinvestment of cash to repurchase and retire shares, EPS increased 10.5% to $ $24.64, surpassing our expectations by $2.64 per share, and surpassing consensus by $2.73.

Looking ahead

As we look ahead, we are bullish even in a tougher economy. The tough economy is a benefit in some ways, as consumers fight to keep their cars on the road longer. We stand by this. 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.

The buybacks are strong. AutoZone repurchased 372,000 shares for $906.0 million in fiscal Q2, at an average price of $2,434 per share. At the end of Q2, there was $1.8 billion remaining under its current share repurchase authorization.

We think a dip toward $2,400 is a good entry point in our opinion, but would love AutoZone, Inc. stock to approach $2,300 if the market gets really bad. It is a great buying level because we see EPS for fiscal 2023 growing.

We should be clear that the valuation is stretched , but a pullback will help. If sales grow in the low double-digits on the back of strong comps, excluding any future buybacks, we still anticipate fiscal 2023 EPS of $120-$130. That is growth over last year, and this suggests that under $2,400, the valuation is looking strong again. At the midpoint, this is 19.2X FWD EPS, and that is a level that as a multiple has been a reliable entry point. Should we get to $2,300, that would be 18.4X. We will add that as AutoZone, Inc. shares decline, the valuation gets even stronger, and as shares are repurchased and the float reduced, valuation also increases.

Final thoughts

AutoZone, Inc. is a tremendous long-term investment. Buying now will likely result in strong gains 3 years from now. But with the threat of recession, and a stock market that we believe is going to fall this spring given the aggressive nature of the Fed, we think you can get a better price for AutoZone, Inc.

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