AutoZone (AZO), the nation’s leading specialty retailer of automotive parts and accessories, will report its fiscal fourth quarter results before the market opens Wednesday.
AZO has been a strong performer this year, trading up nearly 19% year-to-date. And while there are several factors that could create some drawbacks to the earnings report, there are still more positive points to consider that should present upward momentum for AutoZone stock — thus benefiting a profitable call trade.
The Threats to AZO’s Earning Report
The big uncertainty about AutoZone earnings is whether the big jumps in new car sales we’ve seen from Ford (F) and General Motors (GM) indicate a major shift in thinking among car owners that will lead them to reverse their trend toward owning cars longer and incurring greater maintenance costs.
Some worry that Ford and GM’s success reflects changing economic conditions that could drag on AutoZone’s do-it-yourself business.
AutoZone stock has undoubtedly benefited from reluctance among car owners to replace their vehicles during the recession. Older cars need more replacement parts, and AutoZone has used that trend as a reason to pursue expansion plans.
Zacks, although restating its neutral rating on AZO and placing a $442 price objective on the stock, has summed up the other threats quite well:
“AutoZone is focused on aggressive share repurchase program to boost earnings. As a result, the company raised its repurchase authorization by $750 million. Further, the company is focusing on sales increase through the expansion of stores. The company posted a 15.8% rise in earnings per share to $7.27 in the third quarter of fiscal 2013, surpassing the Zacks Consensus Estimate by $0.06. The company’s revenues increased 4.4% to $2.2 billion.
However, the company’s rising debt and interest burden can affect financials in the long term. Moreover, we remain concerned about the rising gas prices and the company’s heavy reliance on its private label brands, which may affect its margins. As such, we continue with our Neutral recommendation on the stock.”
The Good Outweighs the Bad, However
#1: Technicals Look Good and the Pullback Provides Sound Entry
AutoZone stock currently is trading at $417.81, has a 52-week high of $452.18 and a 52-week low of $341.98. It’s currently trading at 16.3 times earnings and 1.7 times sales.
AZO is trading ahead of its 200-day moving average of $409.51, but lower than its 50-day moving average of $433.83.
Shares of AutoZone have now entered into oversold territory, hitting an RSI reading of 29.8. By comparison, the current RSI reading of the SPDR S&P 500 ETF (SPY) is 62.9.
This is a bullish sign that the recent heavy selling is in the process of exhausting itself, and allows for the opportunity of a sound entry point on the buy side, or in our case an options call. The chart above shows the one-year performance of AZO shares:
#2: Strong Financial Background Gives Confidence
As can be realized from the statistics below, AZO has been sound with earnings deliveries and has improved year-on-year.
Also, AZO has a strong history of increased revenue and profit.
#3: The Financials Provide Evidence for a Sound Earnings Report
The bar has been raised.
For its last quarter, AZO reported earnings per share of $7.27. The earnings beat expectations and continued the pattern of quarterly beats that AZO has reported for several years. AZO’s one- and five-year earnings growth rates are both above 20%.
Now check out the expectations by analysts (data courtesy of Yahoo) for AZO in tomorrow’s earnings report.
#4: Countering Threats and Moving Forward
AutoZone has recognized the need to counter the threats presented, and has concentrated on commercial customers such as repair shops, to which many car owners turn when they have somewhat more disposable income. However, there is plenty of strong competition here from rivals O’Reilly Automotive (ORLY) and Advance Auto Parts (AAP).
The biggest source of potential growth that AutoZone stock is looking at comes from e-commerce, where its purchase of AutoAnything should help bolster results. E-commerce is a tiny part of AutoZone’s total business, but the convenience and efficiency involved could help promote solid growth for the future.
Conclusion
AutoZone has shown that it can increase earnings in multiple ways. In the past few years, AZO has increased earnings through increased same-store sales, through expansion, through improving margins, and through diversification. Back in June, AZO authorized a $750 million share buyback.
Analysts have high expectations for AutoZone’s recent quarter. If AutoZone is able to hit analyst estimates, it would mark an increase of 18.5% from the same period last year. The overall auto industry has been in recovery, but that does not change the fact Americans are hanging onto their cars longer. The average age of vehicles on the road today is 11.4 years.
Expect AZO’s streak of increased earnings to continue into the future, and with management’s focus on returning shareholder value through its share repurchase program, AZO is worth its current price and will trade higher following the earnings report.
Therefore, take advantage of the following options call:
Options Trade: Buy the AZO Jan 2014 450 call (AZO140118C00450000) at or under $8.50, good for the day. Place a protective stop limit at $3.40 and a predetermined sell at $13.30.
Visit stock-options-made-easy.com for a wealth of information that will help you benefit from the exciting and lucrative world of options trading.
As of this writing, Ian Harvey was long AZO and ORLY.
