AutoZone: Performance Picks Up, Shares Still Undervalue
The narrow-moat company offers a greater opportunity for patient investors favorable to the sector and willing to endure a multiyear turnaround.
We do not plan a material change in our $770 fair value estimate for narrow-moat AutoZone (AZO) after it posted first-quarter earnings consistent with our fiscal 2018 expectations. AutoZone saw 4.9% revenue growth, spurred by a 2.3% domestic same-store sales increase, alongside 50 basis points of operating margin degradation to 18.1% (against our full-year targets of 4%, 2%, and a 20-basis-point dip to 18.9%, respectively). Sales and costs rose in part as a result of recent hurricanes, which resulted in a 50- to 60-basis-point sales benefit and 35 basis points of operating margin deterioration. Our long-run outlook for mid-single-digit top-line growth and a 19% operating margin, on average, over the next decade remains intact. The shares are trading at a modest discount to our valuation, but we believe Advance Auto Parts offers a greater opportunity for patient investors favorable to the sector and willing to endure a multiyear turnaround.
We attribute the shares’ recent rally to heightened expectations for U.S. corporate tax reform (already incorporated into our estimates) and convergence to our view that the industry’s recent top-line slump is attributable to cyclical factors (mild weather, slower growth in miles driven, the smaller 2008-09 vehicle cohort moving into the repair sweet spot, and economic uncertainty among lower-income customers). While investors remain concerned about digital disruption, improving results throughout the sector and management commentary that the industry pricing dynamic is unchanged give us further confidence that the slump is not attributable to a structural competitive change. Management said the click-and-collect business is growing much faster than ship-to-home, which we believe reflects scaled retailers’ advantage in a do-it-yourself segment that sees motorists seek in-store personnel’s advice to confirm they have identified the right part and to obtain installation guidance even after initiating their research or purchase online.
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Zain Akbari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.