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AutoZone's Drop and the Buying Opportunity

By Chris Hill – Sep 25, 2019 at 1:30PM

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Investors might want to take a bite out of a recently dented stock with big long-term potential.

In this episode of MarketFoolery, Chris Hill talks with analyst Ron Gross about some recent business news. AutoZone (AZO 0.45%) and CarMax (KMX 2.64%) both released quarterly financials and dropped as a result. Gross goes through the biggest numbers from both reports, and explains why long-term investors might want to take a closer look at AutoZone today.

Meanwhile, shares of Tesla (TSLA 0.72%) slumped on a legal battle and yet more unfortunate news about its SolarCity acquisition. The Wall Street Journal reports that WeWork's notorious CEO is stepping down, and good riddance. BlackBerry (BB 0.50%) showed some signs of life and was promptly kicked down a hill. Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Sept. 24, 2019.

Chris Hill: It's Tuesday, September 24th. Welcome to MarketFoolery. I'm Chris Hill. With me, not in the studio --

Ron Gross: No.

Hill: -- we're on location in Washington, D.C., it's Ron Gross.

Gross: Hidden off campus. Undisclosed.

Hill: We are technically underground right now, I think. In our little office. We're here for The Motley Fool Summit, our three-day member event. But there's news. The news never stops, Ron.

Gross: No. We've got jobs to do.

Hill: We've got earnings and news from the automotive world. We have news from a company that, honestly, we haven't heard from in a long time.

Gross: [laughs] There's a reason for that.

Hill: We're going to start with breaking news. We'll just do this quickly because there aren't a ton of details. The Wall Street Journal is reporting that WeWork CEO Adam Neumann is expected to step down. He's reportedly going to stay on as chairman. As Tony Kornheiser would say, I believe we had that. We talked about this on Motley Fool Money last week.

Gross: We did, and I suggested that this is probably what would happen. I think it makes perfect sense. I have some firsthand knowledge -- back in my hedge fund days, we did this exact same thing. Actually, it may have been my investment banking days, we did this exact same thing with a company we wanted to take public, but we insisted that the CEO pop up to the chairman role, and we installed a more of a professional, non-founder type of manager as CEO. I think it makes great sense here. There's too much spiraling around with respect to Neumann. The company has a business model, it's just not a business model worth $47 billion, and it's not a business that should be run by somebody causing such controversy. So, assuming this does happen, I think it's a smart idea.

Hill: It's good reminder that when it comes to CEOs, from a conversation standpoint, it's always interesting to talk about flamboyant CEOs, or just ones that are creative, think out of the box, all that sort of thing; but when it comes to going public, Wall Street wants, for the most part, CEOs that are just going to get the job done. They don't want drama.

Gross: Absolutely not. Listen, it's a common thing that entrepreneurs who are either eccentric or visionaries don't always make great CEOs, especially when you're going around doing a road show, and you have a company that has so much controversy, as WeWork does. You just don't need that as part of selling this deal. To remove that part of it makes good sense.

Hill: Let's get to some earnings news. We'll start with AutoZone. Fourth quarter profits and revenue came in higher than expected. Same-store sales, a little bit better than expected. Stock down about 5% today. What am I missing here? This was a good quarter.

Gross: It's a good quarter. I'm not sure I get that. I think the market as a whole is weak today. There's some political stuff going on that is shaking the markets. It could be a response to that. But, as you say, a pretty good quarter. Revenue up 12%. Now, there is an extra week in there. If you strip away the extra week, revenue's only up about 5%. Maybe that's a little anemic, but still not bad. Same-store sales up 3%. Gross margins down just a bit. Again, perhaps analysts aren't liking what they're seeing with respect to that. Net income up 6%. Earnings per share up even more at 13% due to some pretty aggressive share buybacks that the company has done recently. I think it's a fine quarter. The stock selling off 5% I don't think is something to worry about.

Hill: Particularly when you consider that over the past 12 months, even with the drop today, the stock's up a little bit more than 40%. You mentioned the share buybacks. That's really the story with AutoZone. In addition to trying to execute every quarter, this is a management team that has very steadily done an above-average job of buying back shares.

Gross: For sure. For fiscal year, they repurchased about 2.2 million shares at an average price of $919. The stock's right now a little over $1,100 a share. That's a short-term indicator, but in general seems to be a nice use of capital. This stock has done quite well. The return on invested capital for this company is over 35%. Very impressive numbers.

Hill: Let's stick with cars. CarMax reporting its second quarter. Profits and revenue higher than expected. Same-store sales were a little light. The stock down a little bit. But in general, this seemed like a good quarter for CarMax.

Gross: Again, I think it's fine. It's not as strong a business in my mind as AutoZone is. But, sales up 9%. Wholesale unit sales led the way there, with comps of 4.7. Their used unit, only up about 3.2. Still not bad at all. Some nice strength in their financing unit. Auto financing comes up about 4%. Earnings per share up about 13%. Again, similar to AutoZone, benefiting from a fair amount of buybacks. Repurchased 1.5 million shares. They have $1.8 billion remaining in their authorization for buybacks. Things look good to me. A big thing they've been working on of late was making sure they rolled out this omnichannel so you could go online, in the store, and it's seamless. They expect to have that rolled out to all potential customers by the end of fiscal 2020. Things are on track with respect to that.

Hill: I think they do a good job of improving the car buying business. The omnichannel program that you're talking about, I think there's still room for improvement. Clearly they do as well. But that seems like the sort of thing where, if they can reduce the time it takes to buy a car -- because now, when you want to buy a car, you've probably done some research on your own. If you're buying a used car, you've done the research, you know what you want. So the fact that it still takes in the neighborhood of three hours, that sort of thing, if they can get that down to an hour and a half or something like that ... I don't know. I feel like that only benefits.

Gross: I agree. They have some work to do there. They're really reaching only about 25% of their customer base from an omnichannel perspective right now. They've got 75% to go. That's a lot of steps to make up there, but they're on track. They knew this would be a methodical rollout. It seems like they're getting it done.

Hill: Real quick, before we move on, Tesla shares down 6% today. Shareholders are suing Tesla over their acquisition of SolarCity. This is back in late 2016. On Monday, there were some court documents that were unsealed revealing allegations, among other things, that there was no other bidder for SolarCity. For anyone out there who, at the time, looked at Tesla saying, "Sure, we'll cut a check for $2.6 billion for SolarCity," and raised an eyebrow about that, maybe that was warranted.

Gross: Yeah. Assuming these allegations are true, this is not good. I briefly read it. I think there were also some bonds that were not disclosed as well that had could have had some impact on the price being paid. I haven't been a fan of Musk's modus operandi, the way he does things. This just follows through on that. We'll let the case play out and see if these allegations are true. Of course, they're denying it rather vehemently. But, I haven't been a fan.

Hill: I'm not on Instagram. Are you on Instagram?

Gross: I have an Instagram; I wouldn't say I'm on it.

Hill: Well, The Motley Fool has an Instagram. It's @TheMotleyFoolOfficial. Starting this Wednesday, we're having a contest. You can go over to @TheMotleyFoolOfficial on Instagram. Look for a photo of Motley Fool swag. To enter, you have to answer the question correctly and tag a friend in the comments of the post. If you win, your friend wins, too. There's something in it for your friend. We've got 10 Foolish ball caps, T-shirts -- we've got a bunch of prizes, is what I'm saying. It starts on Wednesday the 25th. If you're on Instagram, check it out @TheMotleyFoolOfficial.

BlackBerry. Do you remember BlackBerry?

Gross: Who doesn't?

Hill: Shares of BlackBerry down 22% today. Hard to remember that BlackBerry used to be a dominant mobile phone player. It's now in the business of communications software. Second quarter report must have been awful because the last time the stock was this low was 2004.

Gross: The thing is, it wasn't really awful. It was one of those missed expectations kind of things. People are not enamored with BlackBerry in the first place, so it doesn't take too much for people to abandon the stock and just say, "I'm done," even though, as you say, they have transitioned from a mobile phone company to a software company and a security company, actually. Machine learning to pre-empt security breaches is a new business that they're in through a February acquisition.

But overall, if I told you revenue was up 16%, and that they broke even to make a little money, I'm not sure you would think that would warrant a fifth of the business being wiped out. But, again, there were two divisions in particular that were weak. It's their internet of things division, which is their enterprise software. The cyber security division, which is the one that came from the more recent acquisition, was also somewhat weak. They had to cut guidance as a result. People just get sick of this and just say, "I'm done. There's better places for my money."

Hill: To the extent that there is a bull case for BlackBerry right now, or just from a standpoint of an individual investor, a case for buying the stock, what do you think? Right now, it seems like BlackBerry is in that "I'm going to take a flyer on this one" category.

Gross: Yeah, that's fair. At the current valuation, it's one of those "value investment or value trap" situations. It looks like a trap in the sense that there is increasing competition in the software space that they're in. They're by no means the only player in town. They have no real competitive advantage that I can see. So, to take a flyer on here, you have to realize that as an investor, you're really taking a flyer.

Hill: Alright, Ron, thanks for being here! I appreciate you doing this.

Gross: My pleasure, Chris!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do for this audio enhanced version of MarketFoolery. The show is mixed by the amazing Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.

Chris Hill has no position in any of the stocks mentioned. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends BlackBerry and Tesla. The Motley Fool recommends CarMax. The Motley Fool has a disclosure policy.

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