Should I Buy AutoZone? 3 Pros, 3 Cons

This pillar of financial stability offers plenty more growth

   
Should I Buy AutoZone? 3 Pros, 3 Cons

If AutoZone (AZO) were a car, it wouldn’t be particularly fast, but it would be reliable.

During the latest quarter, the auto-parts retailer yet again found a way to keep up with Wall Street expectations. Revenues climbed by 4.5% to $2.21 billion to match analyst forecasts, while earnings growth of 7% to $265.6 million ($7.27 per share) actually topped the consensus.

While investors like boring ol’ reliability, they don’t always cheer it on like they have with AZO, which has improved by 18% year-to-date and averaged 30% gains over the past three years.

But can slow and steady keep winning the race — and thus, should you buy AutoZone? To see, let’s look at the pros and cons:

Pros

Massive Footprint: AutoZone boasts 4,767 stores in 49 states — scale that’s critical to serving customers who expect to get the right product immediately. Of course, pulling this off requires more than just numerous locations — the company also invests heavily in its digital infrastructure and supply chain. The company has complex Big Data systems that constantly evaluate a community’s demographics, buying habits and sales trends. These all make it much easier to stock the right mix of inventory.

Global Growth: This is an enormous opportunity for AutoZone, though the company has taken its usual methodical approach to entering new markets. Its main focus is Mexico — a highly fragmented market, but one that allows for ease of access to AutoZone’s supply chain. During the latest quarter, AZO added seven stores in the country, bringing the total to 341. AutoZone is also making investments in Brazil, with one location opened so far, and plans to open 10 to 15 more in the next couple years.

Margins: AutoZone’s revenue rates have been a bit sluggish at an average of 6.9% annually over the past five years, but earnings have made up for it. The company has posted 27 consecutive quarters of double-digit earnings growth. A key part of this has been from the development of private-label products like EconoCraft, ValuCraft and Duralast. AutoZone also has been creative in finding ways to move inventory, which means less cash is tied up.

Cons

Secular Changes: AutoZone could face some significant headwinds in coming years, including the likelihood of strong overall growth in U.S. new-car sales … which will in turn mean less demand for auto parts. Worse, newer cars tend to have better technologies and parts, which should last longer, stretching the cycle further.

Competition: Even with its scale, AutoZone still must keep up with its rivals, who have been adopting some of AZO’s best practices while remaining aggressive on pricing. Primary competitors include O’Reilly Automotive (ORLY), Pep Boys (PBY) and Advance Auto Parts (AAP), though they also face marginal pressure from big-box retailers like Walmart (WMT) and Target (TGT).

Internet Strategy: AutoZone has been trying to bolster its offerings, but the company is still a laggard, as online sales — both in terms of B2B and B2C — represent just 3.5% of total sales. AutoZone has taken steps such as the purchase of AutoAnything.com, but the company probably will have to ramp up its R&D and acquisitions to make real headway.

Verdict

Despite the competitive market and its lackluster digital strategy, AutoZone is positioned nicely for steady growth thanks to the global opportunity and AZO’s investment in its commercial business and infrastructure.

Not to mention, AutoZone has demonstrated it knows how to properly balance the short- and long-term, resulting in solid financials and a juicy return on invested capital of 32.3%.

So should you buy AutoZone? Yes — its pros greatly outweigh the cons, and at 13 times forward earnings, it’s still priced to move.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/05/should-i-buy-autozone-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.