AutoZone (AZO) is among the largest automotive parts retailers in the U.S. The stock has performed well recently, rising over 50% in the last year; however, it is trading nearly 10% down from its 52-week high.
The company recently posted an impressive earnings beat, and AutoZone may benefit from macroeconomic conditions. I am bullish on the stock.
A Mixed Bag on Inflation
The consumer price index (CPI) increased 7.9% year-over-year in February 2022. This is the highest rate the U.S. has seen in the last 40 years. Much of this was driven by the prices of new and used vehicles.
According to the Bureau of Labor Statistics, the price of new vehicles rose 12.4% year-over-year, while the cost of used vehicles has shot up more than 40% over the past year.
These price increases will encourage people to hang on to their current vehicles longer, benefiting auto parts retailers like AutoZone.
On the other hand, AutoZone must also contend with higher prices from its suppliers and an increase in fuel prices. The sudden rise in fuel costs could hurt results. It will be critical to pass on the costs to customers and maintain its margins.
So far, this hasn’t been a problem, as its GAAP operating margin came in at 18.6% in Q2 of Fiscal 2022, an increase from 16.6% in the same period of 2021.
Why Is Vehicle Inflation So High?
So, what is going on in the new and used car market? Much of the issue can be traced to the semiconductor, or “chip,” shortage that has resulted from the pandemic. The well-publicized drought has caused delays in the production of new vehicles, and prices are rising as a result.
By and large, customers are paying well over the sticker price for new vehicles. This trickles down to the used car market as customers who cannot get the new car they want, or can no longer afford it, look to the used car market. Also, fewer new vehicle purchases mean fewer trade-ins, reducing the supply of used cars.
It is truly a perfect storm for inflation in the new and used car market, and it could last for quite a while. If demand for parts increases, it could benefit AutoZone’s already rock-solid results.
Impressive Results and Massive Buybacks
AutoZone has earned $48.03 per diluted share in the first two quarters of Fiscal 2022. This is 43% more than the $33.59 made the year before. Revenue is up 16% over the same period, and gross profit is up 14.7%. The gross profit margin has declined slightly; however, AutoZone has done a terrific job controlling operating costs.
One of the reasons the company has been able to post such gaudy earnings-per-share numbers is the lucrative share repurchase program. In Q2 2022 alone, AutoZone repurchased $1.6 billion worth of shares. This amounts to over 4% of the current market cap. This comes on the back of $900 million repurchased in the first quarter of Fiscal 2022.
This return of capital to shareholders is likely to continue. AutoZone has been buying back its stock since 1998 and has repurchased a whopping $28.2 billion in stock over this time.
Wall Street’s Take
Wall Street analysts are bullish on AutoZone stock, with a Moderate Buy consensus rating. This is based on seven Buys, four Holds, and no Sell ratings assigned in the past three months.
AutoZone may also benefit from the trend away from high-growth tech stocks and into more reasonably-valued profitable companies.
The average AutoZone price target of $2,166.36 implies 14% upside potential.
Is It Time to Get in the Zone?
AutoZone shareholders have been rewarded in recent years, and there is a lot to be optimistic about going forward. The market conditions could be ripe for increased sales, and the company shows no sign of slowing its generous buyback program.
The investment trend away from growth and into value stocks may also be beneficial. AutoZone trades at a reasonable price-to-earnings ratio under 19. Long-term shareholders may find AutoZone to be a steady performer over time.
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