AutoZone: How to Trade AZO Stock Before Earnings

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Driven by falling gas prices and improving unemployment numbers, auto parts retailers have come on strong this year, and AutoZone, Inc. (AZO) is no exception. AZO stock has gained more than 23% year-to-date, with the stock on another hot streak recently after eclipsing the $550 level.

AutoZone, Inc. AZO stockHowever, while AutoZone shares may seem top-heavy, the stock could have more room to run after next week’s quarterly earnings report.

Currently, Wall Street is expecting a first-quarter profit of $7.16 per share from AutoZone, with revenue seen coming in at $2.21 billion. Meanwhile, same-store sales for the quarter are anticipated to have risen 2.6% year-over-year.

Historically, the company has a solid fundamental track record, besting the consensus estimate in 10 of the past 12 quarters by an average of 1.46%. This strong performance may explain why EarningsWhisper.com is reporting a first-quarter whisper number of $7.22 per share for AutoZone.

That said, some analysts have cautioned recently that AutoZone will soon face tough comparisons with 2013, when a rough winter helped drive better than expected results. The concern shows up prominently in ratings data, with Thomson/First Call reporting nine “buys,” 17 “holds” and one “sell” for AZO stock.

What’s more, the 12-month consensus price target of $563.50 represents a discount to yesterday’s close at $588.07. If AutoZone can extend its fundamental winning streak, we could see some upward ratings or price-target revisions in the future.

Pessimism is also present among short-term options traders. Specifically, the December/January 2015 put/call open interest ratio for AZO stock arrives at an elevated reading of 1.48. This ratio rises noticeably when we narrow our focus to just the December series of options (i.e., those options most influence by next week’s earnings), with the put/call open interest ratio coming in at 1.67.

azo stock chart
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Overall, December option implieds are pricing in a modest 3.4% post-earnings move for AZO stock. This places the upper bound near $610.04, while the lower bound resides at $569.96. A rally would take AZO into record high territory, while a decline leaves the shares considerable wiggle room above support at $550, though it would send the stock below both its 10- and 50-day moving averages.

Options Trade on AZO Stock

Given AZO’s strong price action, improving market conditions and the wealth of caution from Wall Street and investors alike, I’m inclined to run with the bulls on this one. Those traders looking to enter the zone might want to consider a Jan 2015 $590/$600 bull call spread.

At last check, this spread was offered at $4.66, or $466 per pair of contracts. Breakeven lies at $594.66, while a maximum profit of $5.34, or $534 per pair of contracts, is possible if AZO stock closes at or above $600 when January options expire. Traders should also note that a double on this trade can be had (at $599.32) even if AZO fails to top the $600 mark, so set your limit orders accordingly.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/autozone-earnings-azo-stock/.

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