AutoZone, Inc. (NYSE:AZO) fell by as much as 10% on the earnings miss. However, for AutoZone stock investors, missing estimates may become the least of their problems. AZO’s debt burden and unpaid liabilities pose a danger to the stock.
Even worse, management’s preference for stock buybacks could create issues for the company and its investors alike. Until the company’s balance sheet improves, investors should avoid AutoZone stock.
AutoZone Stock Reported Strong Growth
The company reported earnings for the second quarter of 2018 of $8.47 per share. This missed consensus by 46 cents per share. Revenues of $2.41 billion beat estimates by $20 million and resulted in 5.2% growth from year-ago levels. Although earnings showed a 9.3% increase on a year-over-year basis, Wall Street did not take the news well, and the stock sold off in morning trading.
The company’s problems remain unrelated to its industry. Auto parts sales serve as a profitable revenue source for investors. The industry’s recession-proof nature also keeps revenues reliable. Although Amazon.com, Inc. (NASDAQ:AMZN) has entered the market, a reluctance to wait on parts reduces the threat Amazon can pose.
This serves AutoZone stock and its peers well. Moreover, the average age of cars has risen to 11.6 years. Since older cars more often need new parts, the aging of vehicles works in AZO’s favor. Still, since customers can also turn to peers such as Advance Auto Parts, Inc. (NYSE:AAP), Genuine Parts Company (NYSE:GPC), and O’Reilly Automotive Inc (NASDAQ:ORLY), store coverage remains essential. The company added 216 stores over the last year to bring its latest store count to 6,088. Hence, coverage continues improving.
AutoZone Stock Remains Deceptively Cheap
AutoZone stock also remains cheap. The equity trades at a price-to-earnings (PE) ratio of 15. This is lower than its three main competitors. Also, of its direct peers, only GPC showed a higher level of sales growth in the previous quarter.
Unfortunately for AutoZone stock investors, the equity appears to hold a low valuation for a reason. As I mentioned after the previous quarterly earnings report, the current ratio remains a concern. Once again, the company’s current liabilities exceed the value of its current assets. The gap between current assets and liabilities narrowed from the last quarter. It stands at about $1.2 billion now. The book value also remains negative, coming in at -$1.565 billion. And as in the last quarter, the debt and accounts payable liabilities almost match the value of the company’s total assets.
Decisions at the top are the likely reason for the negative book value. AutoZone’s leaders appear to prioritize stock buybacks over the company’s financial stability. Shares outstanding fell to 27.35 million, down from 27.49 million. The buybacks seem to have had little long-term impact. With the fall in the stock price after the earnings report, the stock trades only modestly higher than it did after the last earnings report.
Moreover, the negative book value may force a resale of some of that stuck at much lower prices if events force the company to shore up its balance sheet. While new buyers would enjoy the likely discount such a move would bring, it would also bring pain to AZO’s current investors.
Break Down on AutoZone Stock
Although AutoZone missed estimates, investors should focus on the balance sheet and avoid AutoZone stock until management makes the balance sheet a priority.
Despite missing estimates, investors saw profit growth almost reach double-digit levels. With its low valuation, some might find this level of growth attractive. However, a low current ratio and a negative book value should give investors pause. Share buybacks continue to starve the company of much-needed capital that could reduce these liabilities and repair the balance sheet. Until book values reach positive territory, buying AZO stock remains an unwise choice.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.