AutoZone stocks have grown 40,520% since its 1991 IPO. If you had invested $10,000 in the IPO year, it would have become over $4 million today.
Why isn't this stock on top of everyone's list? One possible reason it has managed to stay under the radar is that it has nothing to do with AI or isn't part of trending sectors like digital streaming and technology.
US billionaire and entrepreneur Pitt Hyde founded AutoZone in 1979. Since then, the company has come a long way to become the leading supplier of aftermarket car parts and accessories, with 7,191 stores worldwide. Most of the stores are in the US and offer a wide range of products for various types of vehicles, including light-duty trucks and vans.
Aftermarket car parts are replacement parts manufactured by third-party firms, not the original car maker. These parts showcase the same or even better performance than those from original equipment manufacturers.
Aberdeen Group estimated that the US after-sales market is larger than the economy of most countries worldwide, and US businesses and consumers spend almost $1 trillion annually on things they own. When the car manufacturer's warranty expires, customer loyalty, on average, drops as they seek the same quality parts at cheaper costs.
Businesses offering aftermarket services enjoy high gross margins. AutoZone's gross margin for the quarter ended on February 10, 2024, was 53.9%, a marked increase year-over-year (YoY). Meanwhile, net income for the quarter also increased by 8.1% YoY to 515 million. Its operating margin over the last decade averaged an impressive 19%.
However, with a $51.46 billion market cap, AutoZone has sustained strong growth on solid fundamentals. The company delivered steady earnings-per-share (EPS) growth alongside powerful free cash flow generation through disciplined capital allocation to service existing assets, plan commercial expansion, and pay back shareholders via stock buyback programs.
Despite the pandemic, AutoZone stock has grown at an annualized rate of 6.8% between FY 2013 and FY 2023. The climb is primarily because of the addition of new stores globally and consistent growth in sales from existing stores. The firm's same-store sales (SSS) for the February-ended quarter increased by 1.5% overall. The average SSS growth was 7.2% for the last five fiscal years.
Another key contributor to AutoZone's proven track record is the intrinsic demand in the car aftermarket industry, as people always require functional vehicles despite the economic landscape. The global automotive aftermarket sector was valued at $444.2 billion last year, led by the US. Vantage Market Research estimated the industry to reach $728.3 billion by 2032 at a compounded annual growth rate of 5.65%.
Furthermore, the number of cars hitting the road continues to gain momentum. According to Statista, around 3.12 million passenger cars and almost 12.4 million light trucks were sold alone in the US, totalling 15.5 million light vehicle units (from 13.75 million in 2022). In turn, growing car sales boost the average age of cars and the miles driven annually, resulting in more car wear and tear.
In Q4 2023, the firm's trailing 12-month (TTM) price-to-earnings (P/E) ratio was 20.7, well under the industry average of 27.82. The TTM P/E ratio is the share price upon EPS for the last 12 months, a popular metric to gauge the value of a stock. It is the amount you can expect to invest in a stock to receive $1 of that company's earnings.
A higher P/E ratio could mean the stock is costly and overvalued. A lower P/E ratio means the stock is undervalued with future growth potential.
Meanwhile, AutoZone's environmental, social, and governance (ESG) initiatives have been taking shape rapidly. In FY 2023, the company ramped up recycling efforts and produced 1.7 million kilowatt hours (kWh) of on-site solar energy. Simultaneously, the firm saved 127.6 million gallons of water via innovative irrigation systems since the program's inception.
Focus also remains on supporting non-profits through charitable programs while promoting diversity and inclusivity in its executive leadership team. AutoZone strives to achieve net zero Scope 1 and 2 greenhouse gas emissions by 2050.
The stock was trading at $2,951.49, as of writing this article.
Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.
