AutoZone (NYSE: AZO) was one of the top seven stocks during the financial crisis, with a total return of 22% from 2007 to 2009, according to a 2011 article by Investing Daily’s Jim Fink.
(Fink screened for these stocks by looking for the leading performers between the market peak of October 9, 2007, and the trough on March 9, 2009. You can see his full list of recession-resistant stocks here.)
Tough Times Are a Boon to Parts Sellers Like AutoZone
The stock’s run since then has been no less impressive: AutoZone is now up 139.4% since March 2009, to $366 a share.
Hard times typically benefit auto parts retailers like AutoZone. When money gets tight, consumers often steer clear of car dealerships and keep their old cars on the road longer. In 2011, the average age of the American vehicle hit 10.8 years. That’s a new all-time high, and some 20% of cars are now 16 years of age or older. Moreover, drivers who are handy with a wrench tend to fix and maintain their own cars rather take them in for service. These backyard mechanics are AutoZone’s core market.
However, as the economy has started to pick up, more drivers have been lured back to dealers’ showrooms. As CNBC reports, new car sales surged to a 4.5-year high in November, and total U.S. sales are forecast to hit 14.5 million vehicles this year, up sharply from 10.4 million in 2009. There are a number of factors behind that rise, including a rise in housing starts (which prompts contractors to replace their old pickup trucks) and attractive financing rates.
Rising new car sales are part of the reason why, despite AutoZone’s strong rise, the stock has been largely stuck in neutral for the past eight months.
Last Year’s Warm Winter Continues to Weigh on AutoZone
Even so, AutoZone reported another good quarter yesterday, though its sales came in slightly below the consensus forecast.
In its 2013 first quarter, which ended November 17, AutoZone’s sales rose 3.5%, to $2.0 billion from $1.9 billion a year ago. That fell short of the consensus forecast of $2.13 billion. Same-store sales rose 0.2%. That also missed Wall Street’s expectation of a 2% gain. However, this was largely due to the lingering effects of last year’s warm winter, which was easier on the nation’s vehicle fleet, lowering demand for replacement parts.
Net income rose 6.4%, to $203.5 million from $191.1 million. Earnings per share jumped 15.6%, to $5.41 from $4.68. That’s because the company had fewer shares outstanding thanks to its ongoing share buybacks. The latest EPS topped the consensus estimate of $5.40 by a penny. Gross margins improved to 51.8% from 51.1%.
Still, the sales miss rattled AutoZone investors; the stock declined 3.0% yesterday.
AutoZone Should Benefit From Steady Long-Term Parts Demand
In addition to rising new car sales, AutoZone faces other risks. For example, the U.S. auto parts business is fragmented and highly competitive. Right now, AutoZone leads with a 19.6% share. Advance Auto Parts (NYSE: AAP) is the second-biggest player, with 14.9%.
In addition, new types of vehicles, such as electric cars and hybrids, will make it harder for backyard mechanics to keep doing their own maintenance and repairs in the future. That could have an impact on the company’s business, but with hybrids and EVs combined currently accounting for a small—but rising—percentage of overall car sales, it remains to be seen what effect this will have on AutoZone.
Still, even if parts demand moderates, it should keep growing just by virtue of the fact that there are more vehicles on the road. In the 10-year period leading up to the last recession, for example, commercial and automotive vehicle parts sales rose at a 4% compound annual rate, according to a 2011 Seeking Alpha article by Morningstar’s Zoe Tan.
The company also has strong growth potential outside the U.S. It entered Mexico in 1998 and now has 325 stores in that country—including four new ones that opened in the latest quarter. As well, the latest quarter saw AutoZone enter the fast-growing Brazilian market with its first store in that country.
As well, as Elliott Gue wrote on Seeking Alpha in July, AutoZone only has a 2% market share in auto parts sales to professional buyers, suggesting lots of room to grow there, too.
AutoZone trades at a reasonable 15.1 times its last 12 months of earnings and 13.3 times its forecast earnings for fiscal 2013. In the latest quarter, it bought back and canceled 855,000 of its shares at a cost of $317 million. The company still has $788 million remaining on its current buyback authorization.
Bottom line: AutoZone remains a strong business with solid long-term prospects. Rising new car sales could continue to slow the stock’s progress, but it will still take years to substantially lower the age of the U.S. vehicle fleet. Meanwhile, the company has lots of room to grow internationally and in professional markets. Its ongoing buybacks are an added plus.
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i found this story hard to believe. how can the numbers be right when i can walk into any autozone in tampa and find it full of customers and employees which is a good sign, until you have stood there for 15 minutes while five employees walk around the store stocking shelves, two are in the back pretending to do things and one person with broken english tries to figure out what u want and one person just waits at the register for u to pay. with customer service like this i am surprised people haven’t gone for newer cars sooner.