AutoZone, the IBD Stock Of The Day, flashes signs of strength as inflation jitters slam the broader stock market. AutoZone stock is trading near a buy point.
AutoZone Stock: DIY Auto Parts Sales Leader
The Memphis, Tenn.-based company is a leading seller of aftermarket auto parts. It's growing in the commercial — or do-it-for-me (DFM) market — while dominating in do-it-yourself (DIY) sales, which account for nearly 75% of revenue.
AutoZone derives almost 90% of its revenue from the U.S. The remainder comes from Mexico and Brazil. It boasts more than 6,700 stores worldwide.
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AZO Stock: Retail Play For Inflationary Times
Wall Street expects AutoZone earnings to grow at a solid pace over the next couple of years. In the latest quarter, domestic commercial sales fueled AutoZone earnings growth of nearly 10%, a sharp slowdown from the 49% gain the prior quarter, but resilient in the face of tough year-over-year comparisons.
Amid cost inflation, auto parts sellers are more able to raise prices to compensate than most other retailers, according to Morningstar. Plus, consumers are hanging on to cars for longer amid soaring prices. That means more demand for parts and service.
"This view is holding in the current inflationary wave, with AutoZone and its peers seeing little resistance as they recover costs through pricing," Morningstar analyst Zain Akbari wrote in a May 24 note.
Rivals O'Reilly, Advance Auto Parts … Amazon?
Peers include O'Reilly Automotive, Advance Auto Parts and Genuine Parts.
In 2017, AZO stock and its peers took a hit from reports that Amazon was expanding in the auto parts market. Those fears proved largely overblown.
AutoZone Stock Technical Analysis
Shares of AutoZone eased 1.9% in weak volume on the stock market today, to 2,025. The auto retail stock undercut its 50-day moving average. Despite that pullback, the relative strength line for AZO stock made a 52-week high Monday.
That is indicated by a blue circle at the end of the RS line on the daily MarketSmith chart. It's a sign of outperformance while stocks at large tank on inflation and China Covid fears.
AutoZone stock is trading 11% below a 2,267.50 buy point from a cup base. That base began to form in April after a brief breakout attempt failed. The auto parts retailer has largely consolidated since December 2021. It remains well below the cup-base buy point for now, but could soon offer a handle that would lower the valid entry to 2,130.60.
For most investors, except the most aggressive, the current market correction makes this a better time to be building watchlists rather than making new purchases.
Auto Parts Stock With Winning IBD Ratings
AZO stock is down about 2% this year. But it sports a superior Relative Strength Rating of 95 out of a best-possible 99. That means it has outperformed 95% of all stocks in IBD's database over the past twelve months. It earns the highest RS Rating out of eight stocks in IBD's Auto Parts-Retail & Wholesale industry group.
The stock earns a strong IBD Composite Rating of 90. This rating combines key fundamental and technical metrics in a single easy-to-use score.
AutoZone stock's Comp score is the second highest in its industry group, which itself ranks No. 64 out of 197 industry groups tracked by IBD. Genuine Parts has the highest Composite Rating in this group.
DIFM Sales: Fast Growth But Squeezing Margins
AutoZone scores a strong EPS Rating of 93 out of 99.
In its third quarter ended May 7, the auto parts retailer posted 9.6% EPS growth on a 5.9% revenue gain.
AutoZone saw a 2.6% domestic same-store sales increase, as commercial (or DIFM) sales surged 26%. However, the faster-growing but less lucrative commercial segment weighed on profit margins.
Analysts polled by FactSet forecast that AutoZone earnings will rise 20.9% in all of 2022 as sales grow 9.7%. Both AZO earnings and sales are seen growing further in 2023, but at a lower, single-digit pace.
AZO stock boasts eight quarters of rising fund ownership, according to the IBD Stock Checkup tool. As of March 2022, 2,169 funds owned AutoZone stock, vs. 1,893 in March 2021.
"Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability," Akbari says.
