Is AutoZone Stock A Buy?

AutoZone, Inc. (NYSE:AZO) is the largest aftermarket auto parts and accessories retailer in the United States with over 6,500 stores across the Americas.

The company was at a historic high market capitalization heading into 2020 but its stock crashed alongside the rest of the market. Unlike some brick-and-mortar businesses, it quickly rebounded which was helped by its essential nature.

There is no doubt about how critical its service is to the broader economy – the used car market grew while new cars suffered during the pandemic.

Unstable market conditions and the ability to work, attend class, and play at home supported a cheaper secondary car market. Meanwhile, manufacturers around the country were temporarily shut down.

A new White House Administration brings with it new economic rules, and it’s unclear how the 2021 economy will fare. How will AutoZone steer through an uncertain future.

AutoZone Is A Leader In Automotive Parts 

AutoZone is a leading retailer of automotive parts, tools, and other accessories founded in 1979 and headquartered in Memphis, Tennessee. It quickly grew its brick-and-mortar and online retail footprint across North America and Brazil. This put it in a great position during the coronavirus pandemic.

New cars are among the most expensive purchases an American will make during their lives. Because of this, consumer cars, trucks, SUVs, and vans have a strong aftermarket life, and people are keeping their vehicles longer.

The average person holds a vehicle for nearly a decade, and that means these automobiles need repairs.

This is the bread and butter for AutoZone, which even has free diagnostic services for batteries and vehicle OBD readers. You can rent a powerful tool if only necessary for a one-time use. Its business model helps people keep cars, trucks, and other vehicles running better longer.

Should the economy recover, AutoZone could be well positioned to generate significant gains for investors.

Is AutoZone Stock A Buy?

AutoZone has a P/E ratio of 15x – not lofty by any means in a world where some companies trade at 100x P/E ratios.

With a market cap north of $25 billion and net income of $1.7 billion for the 2020 fiscal year reported in September, AutoZone is arguably a steal from a valuation perspective.

Indeed, a fair market valuation figure corresponds to an AZO price target of $1,377 per share.

AZO’s most recent earnings report represents a 7.2 percent increase from the prior fiscal year, and the company’s earnings per share increased from $63.43 to $71.93 in the time.

Its inventory per store also increased as the company prepared for a busy holiday shopping season with strained delivery and distribution resources across the entire market.

Not only did the company recover from the economic slowdown, but it also opened 60 new stores in the U.S., Mexico, and Brazil. It also increased over 600 percent during the 2010s. This makes it an attractive potential buy for bullish investors who believe the momentum will continue.

Of course, not even AutoZone is immune to market turbulence, even if it is recession resistant.

Risks Of Buying AutoZone Stock

There are reasons to be skeptical about AutoZone’s future prospects. Millennials are less likely to own a car in the first place.

And some research claims that people between the ages of 18 and 34 are more likely to repair their own vehicles.

It doesn’t much matter how long people are holding onto cars if they’re owned by older people who drive less and need repairs less often.

As the economy shifts into a recession, public transportation and ridesharing are more likely to become viable options. And with more people able to work, go to school, and attend events virtually, people are driving less overall.

Then there’s the trend to electric vehicles limiting the company’s growth potential. EVs have fewer moving parts than traditional combustion engines. This means there’s less maintenance even involved, and fewer opportunities for repair. It also means heavily used items like fuel pumps or oil filters will have lower demand in the future.

Even before demand for new cars diminished as “work-from-home” became the new norm, the company plateaued with bearish investors warning of tough market conditions.

While both AutoZone and rival O’Reilly Automotive Inc (NASDAQ:ORLY) rebounded quickly from sharp price declines, neither showed the growth of retailers like Target (TGT), Walmart (WMT), or Costco (COST), much less ecommerce like Amazon (AMZN).

It’s not a good sign of the growth potential moving forward. And there’s competition to worry about.

AutoZone Has Its Fair Share Of Competitors 

AutoZone is the biggest automotive aftermarket retailer, but it’s not the only game in town. It competes with the likes of O’Reilly Auto Parts (ORLY), Pep Boys, NAPA Auto Part, and Advanced Auto Parts on the retail front alone. That doesn’t take into account retailers like Walmart and Lowe’s, each of which sells many of the same products.

Vehicles going electric could also pull in companies like Best Buy (BBY), which already has a robust aftermarket infotainment network. This, combined with its ecommerce strength, keeps AutoZone largely out of an important market subsection. As cars become more computerized, car repair becomes more of a technology game.

Car repair shops (especially dealer-licensed ones) are often vertically integrated, and could bypass the need for these retailers too. And some companies like Carvana and AAA hope to make the car trade-in process easier and cheaper than ever before. And then there are ecommerce giants like Amazon (AMZN) and eBay (EBAY).

Each of these marketplaces would love to upend AutoZone’s foothold on the American car parts market. Amazon’s Prime delivery network is also a threat to the long-term growth potential of any of the above competition.

Is AutoZone Stock A Buy? The Bottom Line

AutoZone was founded in 1979 and grew to become the largest aftermarket automotive parts and accessories retailer in North America. It has a track record of steady growth and sustained a record-high market capitalization over $25 billion throughout 2020.

This is despite temporarily cutting in nearly half to a low of $684.91 per share during the COVID-19 crisis.

However, while it quickly rebounded from the crash, its entire market segment is having trouble growing. AutoZone and other specialty auto retailers stalled while Costco (COST), Target (TGT), and others thrived. Even Best Buy gained more value in 2020, and that’s a sign of tough market conditions ahead for this American retail giant.

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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.