Is AutoZone Stock Recession Proof?

The most recent U.S. employment report, which came out weaker than expected and showed a jobless rate at its highest point since the pandemic, has brought back worries about a recession. The decline could compromise the Federal Reserve’s aim for a soft landing because sustaining high interest rates might hurt future economic development.

Employers in the United States have slowed down their hiring quite a bit. They added an average of 170,000 monthly jobs over the last three months and only 114,000 in July. This is a big change from the 267,000 jobs added monthly in the first quarter of 2024 to 251,000 last year.

The unemployment rate has risen for four consecutive months, reaching 4.3% in July—the highest since October 2021. Historically, such an increase in unemployment momentum suggests that stabilization occurs only after the Federal Reserve cuts interest rates.

Amid such uncertainty, investing in an industry resilient to economic downturn, such as the automotive sector, might be wise. The sector has shown enduring strength over time and typically bounces back from periods of economic downturn. Its strength is predicted to continue, and it is ready for progress and invention until 2035.

One potentially recession-resistant stock in this industry is AutoZone, Inc. (NYSE:AZO). It stands out as a leading retailer and distributor of automotive replacement parts and accessories across the Americas. The company serves different vehicles, such as cars, SUVs, vans, and light trucks, by providing various products, from new or remanufactured car parts to maintenance items.

AutoZone’s vast reach extends to thousands of stores in the United States, Mexico, and Brazil. In the quarter that ended May 4, 2024, the company added 32 new shops in the United States, 12 in Mexico, and one more in Brazil, bringing its total store count to 7,236.

Moreover, the company’s stock has also shown good performance, with shares growing by 22.1% this year. AutoZone has also seen an increase of 11.1% over the last six months and a rise of 12% in the previous month. Such upward movement shows that the company is able to handle economic uncertainties.

AutoZone Has Its Foot on the Gas

AutoZone’s tag lines of Trustworthy Advice and WOW! Customer Service have been tailwinds to support better-than-expected bottom-line results. In the fiscal third quarter, AutoZone’s net sales increased by 3.5% to $4.24 billion from last year’s figure.

Gross profit grew 5.6% from the year-ago level to $2.27 billion. The company’s operating profit also rose 4.9% from the prior year to $900.18 million. In addition, AutoZone’s net income and net income per share increased 0.6% and 7.5% year-over-year to $651.73 million and $36.69, respectively.

The balance sheet is looking pretty solid too with cash and cash equivalents of $275.36 million, up from $277.05 million as of August 26, 2023. So too did total assets rise too $17.11 billion, up from $15.99 billion as of August 26, 2023.

Clearly, the financials are looking pretty good but what if a downturn occurs, will Autozone navigate a choppy economic environment?

Is AutoZone Recession Proof?

AutoZone is likely recession proof if the last downturn is evidence of what is likely to occur in the future. During the 2020-21 downturn, AutoZone posted year-over-year revenue growth in all but one quarter.

One reason the company thrives in downturns is its extraordinary business model with high gross margins. The auto parts firm’s trailing-12-month gross profit margin is 53.18%, well above the industry average of 36.84%.

The trailing-12-month EBITDA margin at 23.63% is also stellar and surpasses the sector’s mean of 11.48% by a factor of more than two. 

So too the trailing-12-month net income margin is 14.60%, much higher than the sector average of 4.62%.

Lastly, AutoZone’s trailing-12-month levered FCF margin of 7.00% sits well above the industry average. 

Combined these metrics highlight that AutoZone has built an attractive business with lots of wiggle room to withstand downturns.

What Is AutoZone’s Investment Outlook?

AutoZone appears to be trading near fair value, which is $3,258 per share according to the consensus among 23 analysts.

For the last three years, revenues have climbed at a CAGR of 8%, though this is expect to slow to 5.5% over the next 5 years.

EBITDA and total assets have grown at CAGRs of around 8% and 6.6%, respectively while net income and EPS increased by a CAGR of about 7.3% and 16.9% over this period. The 5-year forecast for net income growth is closer to 4.9% annually.

In the nearer term, AutoZone’s revenue is forecasted to rise by 6.2% year-over-year, reaching $18.53 billion for the fiscal year ending August 2024 while EPS is expected to grow to $151.94, representing a 14.8% growth compared with last year’s results. Management reported figures that topped consensus EPS estimates in all four trailing quarters.

Further, the consensus revenue and EPS estimates of $19.21 billion and $164.27 for the next fiscal year ending in August 2025 reflect a rise of 3.7% and 8.1% from the prior year, respectively.

Another positive for shareholders is that management does have a buyback in place to support earnings per share but the flipside is that sentiment has dimmed a little with 15 analysts revising their estimates lower for the upcoming quarter.

Another concern is that the price-to-earnings ratio of 20.3x, though not high, is perhaps elevated relative to the forward growth of just 4.9%.

A further drawback can be found on the balance sheet where it’s evident AutoZone’s impressive growth has come at the cost of higher debt, which currently sits at $9.0 billion, up from $5.4 billion at the turn of the decade.

Summing it up, profitability and revenue growth have been standouts while valuation and debt load are looking less attractive and suggest perhaps the better reward to risk opportunity for new shareholders will come on a pullback.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.