AutoZone: Leading Position Among Auto Parts Retailers Prompts Strong Edge, but Shares Are Not Cheap

Despite operating amid a fragmented landscape, we now award AutoZone a wide moat rating, as we have more confidence in the firm’s ability to outearn its cost of capital over a 20-year time horizon. In conjunction, we raised our fair value estimate on AutoZone by 15% to $2,430, from $2,120, due to its moat upgrade and an increase in our top-line forecast that stems from our more optimistic outlook concerning store expansion. We now estimate average annual new store growth of around 2.5% over our 10-year forecast, up from about 1.5%, as we believe the company is well-positioned to consolidate the auto parts retail industry further. We also estimate the firm to post around 3.0% domestic comparable sales growth as AutoZone’s established distribution network should enable it to maintain its lead in the do-it-yourself industry (about 70% of U.S. sales) while expanding its share in the faster-growing commercial aftermarket (30% of U.S. sales). Still, we view shares as modestly overvalued.