There are numerous reasons to appreciate AutoZone. It is an easy business to understand, a market leader, and has delivered exceptional returns to its shareholders. AutoZone operates in an industry with a constant demand, as people require auto parts for their vehicles, and the management has a clear and easily understandable growth strategy. Does all of this mean that you should be investing in AutoZone? This is what I'm going to investigate in this post.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of AutoZone. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in AutoZone's competitors either. Thus, I have no personal stake in AutoZone. If you want to purchase shares or fractional shares of AutoZone, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
AutoZone was founded in 1979 as Auto Shack in Tennessee, United States. AutoZone is the foremost retailer and distributor of automotive replacement parts and accessories in the Americas. AutoZone has 7.140 stores, with 6.300 being in the United States, 740 in Mexico, and 100 in Brazil. Each of their stores offers a wide range of products for cars, sport utility vehicles, vans, and light-duty trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products. AutoZone's customers fall into two categories: DIY (Do-It-Yourself), which includes individuals who prefer to repair, maintain, or enhance their own vehicles, and DIFM (Do-It-For-Me), which encompasses repair shops, service centers, and other automotive partners, also referred to as commercial customers. The do-it-yourself (DIY) segment contributes 71% of the revenue, while the do-it-for-me (DIFM) segment contributes 29% of the revenue. The United States is by far AutoZone's largest market, contributing 89% of net sales, while Mexico contributes 10% and Brazil contributes 1%. AutoZone's management has described its business as straightforward because their primary focus is to ensure that products are in stock in their stores and to fulfill their service commitments by promptly providing the parts to their customers. Time is valuable for their customers, and they need to be able to promptly serve them. AutoZone's competitive advantage lies in its ability to deliver products to customers quickly, giving it a significant edge over smaller competitors. This is due to AutoZone's size and efficient logistics. It means that customers trust AutoZone, which has resulted in AutoZone establishing a brand moat.
Their CEO is Phil Daniele. He had been with AutoZone for over 30 years before assuming the role of CEO in January 2024. He started at AutoZone as a Manager in Training in 1993 and progressed through various areas and roles within the organization. Most recently, he served as the Executive Vice President of Merchandising, Marketing, and Supply Chain before assuming the role of CEO. We don't have much information on Phil Daniele, but former CEO William C. Rhodes has said that Phil Daniele knows this company as well as anybody and has a passion for this business that is arguably unparalleled. He also mentioned that Phil Daniele possesses the skills, temperament, communication abilities, passion, and courage to lead the organization to many more years of success, and referred to him as a tremendous leader. Phil Daniele is expected to continue AutoZone's long-standing disciplined approach and will prioritize their focus on customers. Phil Daniele has been involved in many of the company's most important strategic initiatives over the past decade, which augurs well for the future. Furthermore, the former CEO, William C. Rhodes, will assume a new role as executive chairman, which will facilitate the transition to a new CEO. Thus, while a change in management is always risky, I'm comfortable with Phil Daniele because of his extensive experience in the company and industry, and his expected continuation of the previous CEO's approach.
I believe that AutoZone has a moat, and I feel confident in the management, even though a change in leadership is always risky. Now, let's analyze the numbers to determine if AutoZone meets our criteria for having a strong competitive advantage. If you need an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric we will investigate is the return on invested capital, also known as ROIC. I would like a 10-year history showing growth of over 10% for each year. AutoZone has consistently achieved a high return on invested capital (ROIC) over the past ten years, with ROIC never falling below 30% in any year. The return on invested capital (ROIC) has been exceptionally high in the past three years, which is very impressive. Not many companies manage to consistently deliver a ROIC at these levels. I am very impressed with these numbers, and it will be interesting to see if AutoZone can continue to deliver a return on invested capital (ROIC) at the same level we have seen in the past three years.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. AutoZone has experienced negative equity for the past ten years, which at first glance is not impressive. However, there is a reason for that, as AutoZone has utilized debt to repurchase shares. It might make sense if the stock is significantly undervalued and the debt has a low interest rate. Therefore, it isn't necessarily a negative sign that AutoZone has reported negative numbers every year in the past decade.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is unsurprising to note that AutoZone has consistently produced positive free cash flow every year for the past decade. It is nice to see that AutoZone has achieved the highest free cash flow in the past four years, despite a slight drop in 2023, which can be attributed to macroeconomic factors such as high interest rates. This is also the reason for the decrease in levered free cash flow margin in fiscal year 2023. However, the free cash flow is expected to increase in fiscal year 2024. The free cash flow yield is at its lowest since 2016, but it is still above 5%. This could indicate that the shares are not excessively expensive at the moment. However, we will revisit this later in the analysis.
Another important aspect to consider is the level of debt. It is crucial to determine if a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on AutoZone, I found that the company has 3,03 years of earnings in debt, which is slightly above the three-year threshold. I would like to see management prioritize paying off their debt, especially as interest rates have increased.
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Based on my findings so far, I find AutoZone to be an intriguing company. However, no investment is without risk, and AutoZone also has its fair share of risks. One risk is competition. In its annual report, AutoZone mentions that the market for automotive parts, accessories, and maintenance items is highly competitive. AutoZone specifically states that online and multi-channel retailers often have lower operating costs and prioritize delivery services, allowing them to offer faster, guaranteed delivery times and low-price or free shipping. Furthermore, they mention that the increasing use of digital tools makes it easier for customers to compare prices. As AutoZone's business strategy is based on delivering superior levels of customer service, their cost structure is higher than some of their competitors, which means that lower prices would put pressure on their margins. Macroeconomic factors. During economic challenges, consumers may cut back on their optional spending by postponing vehicle maintenance or repair. Management has recently mentioned that they feel the low-end consumer has begun to pull back on discretionary purchases. AutoZone also mentions that increases in fuel and energy prices may cause their customers to drive their vehicles less, resulting in reduced wear and tear and lower demand for repairs and maintenance. As a result, prolonged economic headwinds could impact AutoZone. The transition to electric vehicles. While Americans are not transitioning to electric vehicles as quickly as in Europe, the sales of EVs have increased from 65.000 vehicles sold in 2017 to more than 800.000 vehicles in 2022. Furthermore, a study from the Pew Research Center found that 38% of respondents said they are very or somewhat likely to seriously consider purchasing an electric vehicle (EV) for their next vehicle. Electric vehicles come with fewer parts, resulting in lower ongoing maintenance costs. The impact of the transition to electric vehicles on AutoZone is uncertain. If electric vehicles require less maintenance, it could potentially affect AutoZone's long-term business prospects.
There are also many reasons to invest in AutoZone. One reason is their international expansion. AutoZone is growing internationally, as evidenced by double-digit growth in same-store sales in both Mexico and Brazil. Same-store sales grew by 17,5% internationally, compared to 3,4% in the United States, in fiscal year 2023. Management has expressed great excitement about the short- and long-term growth prospects of the international market and plans to expedite the opening of new stores over the next several years, aiming to reach a minimum of 200 new international stores by 2028. Management has also mentioned that AutoZone has a very attractive operating margin structure in Mexico. They expect that as their business in Brazil matures and scales over time, they will see similar advantages in Brazil as they have in Mexico. Commercial (DIFM). Management believes that commercial is their single largest growth opportunity. Currently, AutoZone holds a 4%-5% market share in the commercial sector and believes it will be able to further expand its market share in the future. The company expects to continue growing at a significantly faster rate than the market. Management expects double-digit growth in the commercial long term and mentioned that they have ample opportunities for expansion in the commercial sector. Shareholder-friendly. AutoZone is friendly to its shareholders. As we saw earlier in the analysis, AutoZone has utilized debt to repurchase shares. Over the past decade, the number of shares outstanding has decreased from 32,6 million to 17,8 million, representing a 45% reduction in outstanding shares. Since its initial public offering (IPO) in 1991, AutoZone has reduced its outstanding shares by more than 80%. AutoZone has just authorized the repurchase of an additional $2,0 billion worth of shares. It doesn't seem likely to change in the future, as management has mentioned their commitment to maintaining this disciplined capital allocation approach, which will allow them to return significant amounts of cash to shareholders.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 122,53, which is from the fiscal year 2023. I have selected a projected future EPS growth rate of 15%. (EPS has grown by a CAGR of 20% in the past decade, but I am using 15% as the highest rate.) Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on AutoZone's historically higher price-to-earnings (P/E) ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $2.761,82 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy AutoZone at a price of $1.380,91 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.101, and capital expenditures were 733. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures designated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 513 in our calculations. The tax provision was 677. We have 17,857 outstanding shares. Hence, the calculation will be as follows: (3.101 – 513 + 677) / 17,857 x 10 = $1.828,41 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With AutoZone's free cash flow per share at $108,85 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $1.718,29.
I find AutoZone to be an intriguing company. There are some uncertainties regarding the management due to the CEO being new. However, he has extensive experience with the company and has contributed to AutoZone's strategic initiatives. Therefore, I am comfortable with Phil Daniele leading AutoZone in the future. AutoZone is currently facing some short-term risks due to macroeconomic factors, but these are expected to improve in the future. Competition is a risk, and while AutoZone emphasizes the competition from online retailers, I believe that AutoZone will do just fine, as their customers often need the product right away to fix their vehicles. Therefore, I'm not overly concerned about competition. The transition to EVs is more concerning because it is unknown how it will affect the business of AutoZone. The transition will still take time. AutoZone expects that in 10 to 15 years, virtually all new passenger vehicles for sale will be electric vehicles (EVs) in the US. Nevertheless, there will still be a fleet of old internal combustion engine (ICE) cars that will require repair and maintenance. I am pleased to see that AutoZone is expanding its presence in Mexico and Brazil. Once their operations in Brazil mature, it is expected to become a high-margin business, similar to their operations in Mexico. Moreover, the transition to electric vehicles is not as rapid in Brazil and Mexico. EVs in Brazil are only expected to account for 7,4% of sales by 2030, while less than 1,5% of the current total light vehicles sold in Mexico are EVs. Therefore, AutoZone may have a much longer opportunity for growth in Mexico and Brazil. AutoZone also has plenty of room to grow in the U.S. commercial sector, as they currently only hold 4%-5% market share. Management appears very optimistic about their future prospects in that market. Finally, AutoZone is very friendly to its shareholders and seems determined to continue rewarding them. Overall, I have found AutoZone to be very intriguing. However, I would still require a discount before investing in AutoZone due to the long-term risk associated with the transition into electric vehicles (EVs) and the new management. Thus, I will only buy shares if they reach the Ten Cap price of 1.828,41.
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