The past year has been challenging for the auto industry due to supply chain snarls, high inflation, and high borrowing rates. However, auto sales are expected to rebound this year, with a growth of 9%. The auto parts industry is closely linked to the automobile industry. However, it is not entirely dependent on the sales of new vehicles.
The auto parts industry is recession-proof as the demand for auto parts remains stable irrespective of the economic cycle, unlike the sale of new vehicles, which gets affected by macroeconomic conditions. Thus, amid the macroeconomic uncertainty, I believe it could be wise for investors to buy high-growth auto parts stock AutoZone, Inc. (AZO).
AZO’s EPS and revenue surpassed consensus estimates in the second quarter. Its EPS came 12.5% above analyst estimates, while its revenue beat the consensus estimate by 3.8%.
AZO’s Chairman, President, and CEO, Bill Rhodes, said, “We are proud to report solid same-store sales growth on top of last year’s 13.8%. We could not have achieved these results without phenomenal contributions from across the organization. Once again, our AutoZoners’ efforts generated double-digit domestic Commercial growth and single-digit domestic Retail sales growth.”
In the second quarter, AZO repurchased 372 thousand shares of its common stock for $906 million at an average price of $2,434 per share. The company still has $1.8 billion remaining under its current share repurchase authorization. During the quarter, AZO opened 30 new stores in the United States, five in Brazil, and one in Mexico.
For the third quarter, the company expects higher sales to be driven by its commercial business.
AZO’s revenue grew at a CAGR of 11.8% over the past three years. Its EBITDA grew at a CAGR of 12.8% in the same time period. Moreover, its EPS grew at a CAGR of 23.1% during the same time frame.
AZO’s stock has gained 15.9% in price over the past nine months and 24.1% over the past year to close the last trading session at $2,502.05.
Here’s what could influence AZO’s performance in the upcoming months:
Robust Financials
For the fiscal second quarter that ended February 11, 2023, AZO’s net sales increased 9.5% year-over-year to $3.69 billion. The company’s gross profit increased 8.1% from the year-ago value to $1.93 billion. Its operating profit came in at $669.98 million, up 6.9% year-over-year. In addition, its net income rose 1% year-over-year to $476.54 million, while its net EPS came in at $24.64, representing an increase of 10.5% year-over-year.
High Profitability
In terms of the trailing-12-month EBIT margin, AZO’s 19.43% is 150% higher than the 7.77% industry average. Its 10.98% trailing-12-month levered FCF margin is 473.8% higher than the 1.91% industry average. Likewise, its 35.37% trailing-12-month Return on Total Capital is 457.1% higher than the industry average of 6.35%.
Positive Analyst Estimates
The consensus EPS estimate of $128.98 for the fiscal year 2023 represents a 10.1% improvement year-over-year. The consensus revenue estimate of $17.48 billion for the same year indicates a 7.6% increase from the prior year. Its EPS and revenue for fiscal 2024 are expected to increase 13.3% and 5.2% year-over-year to $146.18 and $18.39 billion, respectively.
AZO’s EPS and revenue for the quarter ending May 31, 2023, are expected to increase 7.9% and 6.4% year-over-year to $31.32 and $4.11 billion, respectively. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
POWR Ratings Show Promise
AZO has an overall B rating, equating to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AZO has an A grade for Quality, consistent with its high profitability. It also has a B for Growth and Sentiment, in sync with its solid historical growth and favorable analyst estimates.
AZO is ranked #20 out of 59 stocks in the A-rated Auto Parts industry. Click here to access AZO’s ratings for Value, Momentum, and Stability.
Bottom Line
AZO’s stock is trading above its 50-day and 200-day moving averages of $2,454.60 and $2,334.29, respectively, indicating an uptrend. As the total average age of passenger cars and light trucks in the United States came in above 12 years, the demand for automotive parts to keep the existing vehicles running is high, benefitting AZO.
As the company grows its store footprint, it is expected to grow its sales further.
Given its robust financials, favorable analyst estimates, solid historical growth, and high profitability, it could be wise to invest in the stock.
How Does AutoZone, Inc. (AZO) Stack Up Against Its Peers?
AZO has an overall POWR Rating of B. You might want to consider investing in the following Auto Parts stocks with an A (Strong Buy) or B (Buy) rating: Gates Industrial Corporation plc (GTES), BorgWarner Inc. (BWA), and LKQ Corporation (LKQ).
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AZO shares were trading at $2,500.49 per share on Wednesday afternoon, down $1.56 (-0.06%). Year-to-date, AZO has gained 1.39%, versus a 6.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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